ETF Edge

This ETF run by a robot is beating the market—here's how it works

Man vs. machine: This ETF is beating the market using artificial intelligence
Man vs. machine: This ETF is beating the market using artificial intelligence

It's the age-old battle: man versus machine.

Artificial intelligence and machine learning (see: robots) are slowly seeping into every industry in the market, from manufacturing to health care to agriculture by way of tomato picking.

A.I. has even taken hold in the world of investing, with Morgan Stanley using deep learning to test and fine tune its analysts' investment strategies.

And, now, it's infiltrating the world of exchange-traded funds with a new product from EquBot: The AI Powered Equity ETF, ticker AIEQ, up 19% year to date versus the S&P 500's 17% gain.

"It's powered by IBM Watson," EquBot co-founder and chief operating officer Art Amador tells CNBC's "ETF Edge."

"The idea is to recognize patterns across management teams, across financial statements, across news [and] things like social media, to identify trends that are occurring in the marketplace and to capture the companies that are going to appreciate the most over the next six to 12 months," he said.

The function is similar to what Morgan Stanley is using to bolster its analysts' calls. The machine behind the ETF reads through over 1 million pieces of data per day including SEC filings, earnings reports, news stories and social media posts to determine which stocks it thinks are heading higher, Amador said.

"What we care about is how the market is pricing the various companies, the various industries," he said. "So, as the data changes, news or financials might become more important. We care about what's being rewarded in the market."

As time goes on, the bot gets more intelligent. When stocks including AIEQ collapsed the fourth quarter of 2018, the ETF was rebalancing and picking up high-quality names like Coupa Software, which is now up 117% this year, the COO noted.

For ETF experts like Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, this ETF — which counts Amazon, Alphabet, tax giant Intuit and whiskey maker Brown-Forman among its top holdings — can offer investors a valuable glimpse into its so-far market-beating strategy.

"Because this is being refreshed potentially on a daily basis, knowing what's inside it [and] having that transparency can help an investor to understand what's shifted day to day, week to week, month to month, because it is really driving the underlying holdings for the performance of the ETF," he said in the same "ETF Edge" interview.

Tim Seymour, founder and chief investment officer of Seymour Asset Management, agreed.

"Having an artificial-intelligence approach to finding the companies that are also moving based upon momentum and fundamentals, I think, is pretty interesting," he said.

AIEQ lost nearly 2% in Friday's trading session.