AI Powered ETF AIEQ Might be a Rare Case of Artificial Intelligence Being Useless

Some ETFs are based on brilliant ideas to slice up the stock market and produce a screen that results in a convenient way to target a narrow slice of the vast global equity market. Others rely on high-powered analytics. But when I saw that some ETF providers were starting to essentially use Artificial Intelligence as essentially the robo-portfolio manager, I figured, what could possibly go wrong? As it turns out, a lot can go wrong. And it has in this case.

AIEQ vs. QQQ: Performance and ‘Negative Alpha’ Explained

When visiting the fund’s home page, an all too familiar ETF issue arises. The fund sounds like it is doing something very different. Yet it produces a portfolio that ends up being insufficiently different from the broad market, in this case the Nasdaq 100 ETF (QQQ). Furthermore, despite plenty of overlapping holdings to keep its performance in the game, the rest of the portfolio apparently has been a drag. End result: negative alpha. That leads to my conclusion that this ETF sounds innovative, but is really more a case of the “usual suspects,” which happens a lot in the ETF business.

Equibots and Watson and hedge fund-like strategies are similar to when financial advisors still try to cite Nobel Prize-winning theories on asset allocation from the 1980s. It’s product marketing, not alpha-hunting, folks.

That doesn’t mean that there isn’t some attempt to do well here, and offer something that investors can glom on to, powered by AI. But results count, especially in a market where tech stocks dominate. The biggest negative of AIEQ is not its strategy, but rather its inability to show it is significantly better than QQQ. It’s not really even close, in part due to the strong performance of QQQ in recent years.

Portfolio Overlap: Why Similar Holdings Don’t Mean Similar Results

A glance at the top holdings of that popular ETF and AIEQ reveals that there’s a lot in common, at least at the top of the portfolio. That might sound like it is a good thing. However, it is the top reason not to consider a $100 million ETF when there’s a firmly established similar fund with a lower expense ratio (versus AIEQ’s 0.75%) and a habit of trailing the non-AI-driven QQQ.

AIEQ vs. QQQ top 10 holdings. Source: Ycharts.

In fact, about half of AIEQ’s portfolio overlaps with QQQ. Roughly 1/3 of AIEQ’s 150 holdings are also in QQQ, which only holds about 100 stocks.

AIEQ vs. QQQ overlap summary. Source: Ycharts.

AIEQ portfolio valuation summary. Source: Ycharts.

That means, as shown above, that AIEQ is just as overvalued as QQQ, and has an earnings growth rate that is expected to be solid, but not something that is bound to justify its lofty current earnings multiple.

Rolling Returns: Short Spurts of Outperformance, Little Consistency

There have been some fleeting periods of outperformance for AIEQ, as shown here. But this is not enough to consider it seriously versus many established tech-laden ETFs.

AIEQ vs. QQQ, rolling returns. Source: Ycharts.

This table below shows that like the broad market, tech is the driver, both literally and figuratively, with this ETF. And nearly half of AIEQ is spread across tech and communications stocks.

AIEQ sector allocation. Source: Ycharts.

Bottom Line: When (If) AIEQ Might Actually Make Sense

AIEQ sounds impressive on paper. But it has had a while to prove its point. Maybe there’s a market climate in which it consistently makes itself useful. But as they say, if you aim for the king, you best not miss. And so far, this sexy-sounding ETF has not threatened to make investors and traders forget about QQQ.