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AI’s Top U.S. Picks: An AI-Driven Investment on Stash

June 12, 2018

Ready to add a little artificial intelligence to your portfolio? No need to look further into the future than today.

3 min read

In the movie “Her,” by Spike Jonze, the actor Joaquin Phoenix falls in love with Scarlett Johannson, who plays the voice of an intelligent operating system that befriends him and manages various aspects of his life.

Artificial intelligence (AI), where computers actually reason and make decisions, may seem like the stuff of movies, but it actually exists today, and it’s making big inroads into our daily lives.

Marketers use it to make decisions about what to sell you next. Self-driving cars crunch reams of data on the fly to steer cars in real time.

And artificial intelligence, sometimes referred to as machine learning, is even being used to pick stocks for portfolios.

In fact, AI’s Top U.S. Picks is one of the first exchange-traded funds that uses artificial intelligence to decide what stocks to include in the fund.

How does AI choose the investments?

The fund’s underlying securities are chosen by something called EquBot, a stock picking algorithm that runs on IBM’s artificial intelligence platform called Watson.

Watson is a natural language processing computing platform that uses algorithms to analyze massive amounts of data, to create solutions in various business environments ranging from health care to investing.

In AI’s Top U.S. Picks’ case, it’s been employed to help EquBot pick stocks that it thinks are most likely to increase in value over the next 12 months, based on economic conditions, trends and world events, according to the fund managers.

EquBot mines millions of pieces of data from regulatory filings, quarterly results, news articles, even social media posts.

“EquBot AI Technology with Watson has the ability to mimic an army of equity research analysts working around the clock, 365 days a year, while removing human error and bias from the process,” EquBot chief executive officer and co-founder Chida Khatu said in a statement when the fund launched in October 2017.

What’s inside the fund?

AI’s Top U.S. Picks is based on the AI Powered Equity ETF, managed by EquBot LLC, in partnership with ETF Managers Group. Its ticker is AIEQ.

It’s an exchange-traded fund or ETF. But unlike many ETFs, it doesn’t follow a particular index. Instead, its general goal is to invest in 30 to 70 different companies, whose volatility matches the broader market for equities, and that the algorithm forecasts will grow, according to the prospectus. It currently invests in 83 companies.

Some of the top holdings include Google parent company Alphabet, gaming chip maker NVIDIA, customer relationship management software company Salesforce, and the wholesaler Costco, among others.

The majority of the fund’s holdings are in the U.S. About 3% are in Asia and Latin America.

Performance

Performance data for AI’s Top U.S. Picks is limited since it launched in October 2017. Year to date, as of May 2018, the fund had a return of 1.87%, according to Morningstar.

Other funds like this

While there are plenty of ETFs that invest in artificial intelligence companies, fewer actually use AI to structure their portfolios. MIND, an AI ETF run by Horizons ETFs Management, invests in other index funds that match sectors, such as small business and technology. Year to date, as of May 2018, the fund had a return of 0.28%, according to Morningstar.

This fund trades on the Toronto Stock Exchange, in Canada.

How risky is this investment?

The fund has standard risks, related to swings in the market since it invests in equities. But the technology used to pick stocks is also new, according to the fund prospectus, and could be subject to human error as well as flaws related to its newness.

The fund also tends to invest in smaller companies, which can increase volatility in a portfolio, as such companies may not have established track records or sales, according to the prospectus.

Fees

The fund, which is actively managed by EquBot, has an expense ratio of 0.75%. The average expense ratio for an ETF is 0.23%, according to industry sources.

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By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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