Simplify Asset Management to roll out ETFs based on AI-driven stockpicking

Oct 12 (Reuters) – Simplify Asset Management plans to roll out three new exchange-traded funds (ETFs) that rely on artificial intelligence rather than human beings to select portfolio holdings, adding to a nascent sub-sector that has so far delivered underwhelming results for investors.

In an SEC filing late on Tuesday, the ETF provider said it will rely primarily on recommendations from models designed by Boosted.ai, an AI consulting firm serving the financial industry, when making buy or sell decisions.

According to data from Morningstar Direct, a total of 13 ETFs already incorporate artificial intelligence into their investment process, although the 0.20% management fee that Simplify proposes to charge is well below the median of 0.75%.

That low fee may tempt at least some of the many skeptical investors who have lingered on the sidelines to dip their toes into this still-new approach, said Todd Sohn, ETF and technical strategist at Strategas Securities.

“A large portion of the investment community remains wary of putting their money into a product that depends on algorithms,” Sohn said. “What if it over-trades?”

There is reason to be wary, other analysts said. Typically, an actively-managed mutual fund or ETF may have a portfolio turnover rate of 50% or even 100%, with an annual turnover rate of 100% meaning the manager sold and replaced the entire portfolio once over the course of the year.

ETFs in which investment decisions are powered by AI have turnover rates that range from around 150% to as much as 1,700% for one of the most-watched products in this niche, the AI Powered Equity ETF .

The largest fund in this $673.5 million slice of the $7 trillion market for U.S. ETFs is the WisdomTree U.S. AI Enhanced Value Fund (AIVL.P), with net assets of $363.4 million. While the WisdomTree ETF’s fees, at 0.38%, are lower than those of AIEQ, and its turnover is at the bottom of the list, it has seen net ouflows so far in 2023, while the short-term performance of AIEQ has led to modest net inflows.

Of the 13 funds Morningstar tracks, only two, the VanEck Social Sentiment ETF and the QRAFT AI-Enhanced U.S. Large Cap Momentum ETF , have outperformed the nearly 15% gain by the Standard & Poor’s 500 index so far this year.

“I’m not sure the technology is there yet, or that it’s speaking to investors,” said Bryan Armour, an ETF analyst at Morningstar.

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