Artificial Intelligence: The Future Of ETFs?

By Jeff Schlegel/ ETF Advisor

As artificial intelligence has gone from science fiction to reality it has altered the commercial landscape and is driving what’s being called the Fourth Industrial Revolution, which is defined as the confluence of genetics, artificial intelligence, robotics, nanotechnology, 3-D printing, biotechnology and other cutting-edge fields coming together to fundamentally transform how the world lives and works.

AI is a broad concept encompassing various components, including machine learning and natural language processing. In toto, AI’s value proposition is that it can efficiently consume and collate the reams of data being created as the Information Age increasingly careens into overdrive. That has potential implications for white-collar industries, and indeed AI is making inroads in the investment management space.

On one level, a passel of exchange-traded funds provide investors with an efficient way to invest in companies enabling—and potentially benefiting from—the AI phenomenon. Beyond that, several ETF providers are using AI as a primary tool to take a fresh approach to portfolio construction.

That includes stalwarts such as BlackRock’s iShares unit and State Street Global Advisors’ SPDR franchise, both of which have rolled out newfangled funds that rely on AI and data science to rejigger the classification of investment sectors and/or how companies fit into sectors.

The new wave of AI-fueled ETFs also includes several upstart companies such as EquBot, which has two ETFs on the market that use IBM Watson and other analytic platforms to, in the company’s words, utilize “artificial intelligence to replace the portfolio manager to process more market data and generate unbiased investment decisions given a set of investment criteria.”

These AI-based ETFs include both actively and passively managed products, and the firms that provide them are planting their flags on terrain that’s expected to significantly expand. Luke Ellis, CEO of Man Group Plc, a London-based active management firm with roughly US$114 billion in assets, has stated his belief that machine learning could be involved in 99% of investment management within a quarter century.

(Of course, that feeds into fears that widespread deployment of AI—and robotics—will lead to massive employment displacement and social upheaval, but that’s another story for another day.)

Nonetheless, all of this AI talk is heady stuff. But will AI replace humans in the investment management sphere? Or can the two be buddies working in tandem to create the best portfolios possible?

Whole Lotta Data

EquBot (pronounced ek-cue-bot) stands for equity robot, says Art Amador, chief operating officer and co-founder of the San Francisco-based company. He says the initial idea for EquBot started in 2014 and 2015 from two insights that he and the company’s other two co-founders gleaned while getting their MBAs at the Haas School of Business at the University of California, Berkeley...