AI-powered investment fund beats the market by almost 100%

IBM's Watson supercomputer is working wonders in an area where OpenAI's ChatGPT does not have much to offer, the stock market. An exchange-traded fund (ETF) is using the power of artificial intelligence (AI) to balance its portfolio and has done pretty well for itself this year, ETF.com reported.

At a time, when the capabilities of ChatGPT, OpenAI's conversational chatbot are all over the media, it is difficult to find what the AI simply cannot do. However, the ingenuity of humans shone through one more time as somebody asked the chatbot for stock market advice.

ChatGPT responded that the stock market was too hard to predict and that it did not have access to live stock data. However, ETF Managers Group, in partnership with a fintech firm Equbot has been using AI to pick holdings in the $102 million AI-powered Equity ETF (AIEQ) since 2017. The fund has doubled the returns on the Vanguard Total Stock Market ETF (VTI) this year.

How does the AI-powered ETF work?

The AIEQ has 114 securities in its portfolio and taps into the processing power of the Watson supercomputer built by IBM to decide which securities to hold and which to replace.

Instead of simply relying on standard market data as available from the likes of Bloomberg or S&P, AIEQ also looks through unstructured data such as earnings calls, keyword data, and tweets, Chris Natividad, Chief Investment Officer at Equbot told ETF.com

While the VTI was up 6.7 percent up to Jan 27 this year, AIEQ was up 13.5 percent in the same period.

Just the beginning

This might sound like good news for a lot of investors who would want to leave the hassle of managing their portfolio to a bot and enjoy the riches it generates. However, the positive news from the bot has come after a long wait of nearly six years.

During this time, the AIEQ has largely trailed the VTI. Considering a three-year average, the AIEQ provided a 4.8 percent return while the VTI's return was 9.1 percent. Going back further, the AIEQ's return is marginally better at 5.5 percent while the VTI delivered an 8.6 percent return.

The difference in the returns assumes significance when one considers that the VTI's portfolio has nearly 4,000 securities as against AIEQ's 114. Considering that the AI uses machine learning to pick its stocks, it is perhaps only now that the bot is getting better at it and the near future will demonstrate what it is really capable of. Or maybe, it will do just as well as the hamster did to trade crypto at its peak.

Even if you were willing to take the risk, one must warn you that the AI's powerful advice also comes at a financial cost. The AIEQ is an actively managed ETF and charges 0.75 percent for the transactions carried out. On the other hand, the VTI levies a rock-bottom price of 0.03 percent on your transactions. That is something you need to consider as well, before deciding to give all-in to the bot.

No need to rush, this is just the beginning of the AI age and there will likely be more options to choose from in the future.