Today four funds are launching on different exchanges, including two actively managed municipal bond ETFs, a fund targeting “iconic” companies and an actively managed fund driven by IBM’s Watson computer.
An AI-Focused ETF
The AI Powered Equity ETF (AIEQ), a fund from ETF Managers Group, launched today. The fund is the first actively managed fund to be offered on the ETFMG platform.
The fund comes with an expense ratio of 0.75% and lists on the NYSE Arca.
EquBot co-founder and COO Art Amador points out that previously most AI-based strategies have only been available in the form of a hedge fund. His firm went with an ETF because “ETFs are inclusive by nature,” he noted.
Investing In The Information Age
What drives the new fund really though, is the explosion of information that has occurred in recent years. Amador cites a Bloomberg article that said 90% of the available information today was generated in the last two years. There is more data to analyze than ever before.
“The only way to understand it is to use artificial intelligence,” Amador added.
AIEQ uses a quantitative proprietary model from EquBot that runs primarily on IBM’s Watson platform, the prospectus says. The fund leverages the power of Watson, the IBM supercomputer, to analyze vast amounts of information on a daily basis, essentially doing the work of a multitude of equity research analysts.
“We’re utilizing publicly available financial data such as 10-Ks, 10-Qs and current market forecast data to build predictive financial models on over 6,000 publicly traded U.S. companies,” Amador said. “We analyze company management, company and market sentiment, and every day we’re analyzing more than 1 million regulatory filings, quarterly releases, news articles and social media postings.”
“We combine the social cues, the trading analytics, traditional financial ratios and news into financial models and build a U.S.-focused equity portfolio that aims to match the risk of the broader U.S. market and delivers superior returns,” he added, noting that EquBot uses Watson to process millions of “unstructured” market signals. The firm has several patents in place related to its investment process.
Leveraging The Data
EquBot’s model ranks U.S. stocks across the size spectrum on a daily basis with regard to how likely they are to benefit from the available information regarding economic conditions and current events, selecting 30-70 equities that show the greatest potential for appreciation over the next one-year period. The model indicates a recommended weighting for each company based on its appreciation potential and its correlations relative to the other companies held by the ETF. AIEQ’s managers aim to maintain a volatility level similar to that of the broad U.S. market.
IBM’s Watson has machine learning capabilities, which means it can improve upon its analysis approach as it gathers more and more data. Amador note that Watson’s learning capabilities mean that the fund will see improvements in things like trading and execution, and it’s more able to provide consistent performance across varying market conditions.
“It actually grows in value with age,” he said. “We at EquBot believe there’s actually a new era of investing—one not constrained by capitalization, factors or style, but dependent on data and information.”
The $9 million BUZZ US Sentiment Leaders ETF (BUZ), which launched in 2016, was the first fund to incorporate artificial intelligence into its approach; however, its strategy is mainly focused on identifying bullish sentiment about different companies through analysis of various media sources.
Global X Fund Targets Consumer Brands
Global X is launching an ETF designed to target well-known brands. The Global X Iconic U.S. Brands ETF (LOGO) tracks an index from Accuvest Global Advisors that covers business-to-business (B2B) and business-to-consumer (B2C) companies that offer exposure to consumer behaviors.
The fund comes with an expense ratio of 0.48% and lists on the Bats exchange, which is owned by ETF.com’s parent company, Cboe Global Markets.
“The overarching case behind it is really if you look at the U.S. economy from the top down: 70% of GDP comes from consumption. It’s just the single biggest driver of the U.S. economy,” said Jay Jacobs, vice president and director of research at Global X.
However, he also points out that the two consumer sectors combined only represent about 20% of the S&P 500, and that other sectors reflect the consumption theme, such as technology and health care.
LOGO’s underlying index selects its components from the largest 1,500 listed U.S. companies. The index boils its selection universe down to 100 companies selected from two categories, the prospectus says.
Tier 1, which includes up to five companies from each of the index’s designated subindustries, primarily consists of B2C companies that offer direct exposure to consumer habits.
Tier 2 includes mostly B2B companies that play key roles in the consumption supply chain as well as those that engage directly with consumers; the index can include up to two companies from each subindustry with respect to the second tier.
Companies from both tiers meeting size and liquidity requirements are assigned an Iconic Brands Score based on market capitalization, sales and growth rate. The top-ranked firms are selected for the index using the guidelines for each tier.
From there, the index components are assigned an Iconic Brands Strength score based on their revenue growth and cash flow, and ranked accordingly, the prospectus says. The top 25 components are weighted at 2% each to represent 50% of the index, while the remaining 75 companies are equal-weighted and represent the other half of the index’s total weight.
The goal, ultimately, according to Jacobs, is to target the largest brands falling in with the consumption theme that are also exhibiting the strongest growth.
The prospectus notes that consumer discretionary, consumer staples and information technology are generally the largest sectors within the portfolio.
IndexIQ Adds 2 Active Muni Funds
IndexIQ is rolling out two actively managed ETFs that target the municipal bond space with the intention of providing current income exempt from federal income tax. The IQ MacKay Shields Municipal Insured ETF (MMIN) and IQ MacKay Shields Municipal Intermediate ETF (MMIT) both list on the NYSE Arca and come with expense ratios of 0.30%.
Investment management firm MacKay Shields subadvises both funds. The firm uses a macro approach to start with, evaluating a wide range of factors affecting the municipal bond market, from tax rates to global economic data to determine its strategy. From there, it uses fundamental, bottom-up credit research analysis to select each fund’s portfolio, according to the prospectus.
MMIN will invest in mostly investment-grade municipal bonds covered by insurance policies that guarantee interest and principal payments. The prospectus notes that such funds generally have higher prices or lower yields to reflect the costs of the insurance, and says the fund can also purchase insurance on a bond, though most of its holdings will generally have insurance already in place.
The fund’s methodology requires the fund diversify its holdings across at least 10 different muni bond sectors and at least 15 different states. Only 25% of the portfolio can be invested in securities that would be affected significantly by the same economic, business or political event, and only 30% can be invested in securities from a single state, the prospectus said.
MMIN targets a dollar-weighted duration of three to 15 years.
MMIT, meanwhile, uses a similar process and has the same diversification requirements for its portfolio, but it is not required to invest in insured bonds or buy insurance for its holdings, instead investing in ordinary federal tax-exempt municipal bonds. It targets a dollar-weighted duration of three to 10 years.
Contact Heather Bell at [email protected]