AI fund that's beating S&P 500 has shifted into tech stocks

A machine-guided fund which is crushing the performance of the S&P 500 Index this year has shifted heavily into technology stocks and slashed holdings of cyclical industrial names since the U.S. election.

The AI Powered Equity ETF (AIEQ), an exchange-traded fund driven by artificial intelligence, now has more than 37% of its holdings in tech, a rise of 9 percentage points from Nov. 3, according to data compiled by Bloomberg. It halved its industrial exposure to about 3%.

The fund has risen some 12% so far this year versus a near 3% gain in the S&P 500 and beat the U.S. equity benchmark by about eight percentage points last year.

“We’re unsure if this is the algo essentially turning its figurative back on the ‘reopening trade’ or just finding more value in tech,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note Tuesday. “AIEQ seems to have been picking up a good bit of market ‘signal’ in the last 12 months, so the fact that it is lightening up on cyclicals at the top of the sheet and maintaining/increasing its exposure to disruptive tech names is interesting.”

The fund’s “manager,” a quantitative model that runs 24/7 on IBM Corp.’s Watson platform, has about doubled its position in Tesla Inc. over the period to 4.5%, the data showed. Its exposure to Apple Inc. has about halved. Despite slashing health care exposure, holdings in vaccine maker Moderna Inc. have gone to 2.8% from 1.1%.

[More: Advisers warming up to AI]

QUANT MODEL

The quantitative model behind the $130 million fund, developed by EquBot, assesses more than 6,000 U.S. publicly traded companies each day. It scrapes millions of regulatory filings, news stories, management profiles, sentiment gauges, financial models, valuations and bits of market data, and then chooses about 30 to 70 stocks for the fund, which is run by ETF Managers Group.

Launched in October 2017, the AI Powered fund has seen a total return of about 75% since inception, compared with 60% for the S&P 500.

“AIEQ’s portfolio always reminds us of the long side of a successful 1990s hedge fund manager’s book. You see a lot of well-known stocks that play well-understood themes,” said Colas. “Perhaps the real power of artificial intelligence-powered investing is simply not overthinking things too much.”

[Video: SolarWinds cybersecurity hack should raise adviser scrutiny of tech vendors]