As exchange-traded funds built around the artificial intelligence revolution continue to pour into the market, questions remain as to whether funds utilizing the technology's algorithm for stock selection offer an information advantage.
"It's perhaps a smarter way of picking stocks," Todd Rosenbluth, head of research at VettaFi, told CNBC's Bob Pisani on "ETF Edge" on Monday. "I know that computers can be smarter than I am, [it's] whether they're going to be better at outperforming the broader S&P 500. There's no emotion behind it."
Rosenbluth explained that VettaFi is seeing increased interest in actively managed ETFs that are driven by AI. The QRAFT AI-Enhanced U.S. Large Cap Momentum ETF (AMOM), for example, uses an artificial intelligence system to select large-cap stocks for its portfolio. Its largest holdings include Nvidia, Walmart, Home Depot and O'Reilly.
Rosenbluth also suggested Teucrium ETFs, which have incorporated the technology into selecting commodity funds. The AiLA Long-Short Agriculture Strategy ETF (OAIA) product harnesses machine-learning technology with a goal of generating returns in excess of the market regardless of which direction it goes. The AiLA Long-Short Base Metals Strategy ETF (OAIB) uses the same approach to offer exposure to core base metals.
The AI Powered Equity ETF (AIEQ) is among the oldest to harness AI technology, by using IBM's Watson platform to analyze thousands of U.S. companies for stock selection.
But the fund's largest holdings include Coinbase, Roku, DoorDash and RH, offering little exposure to mega-cap tech and chip stocks that have been fueled by the AI craze this year. The AIEQ has continued to trail the broader market in 2023, up 14% compared with the S&P 500's gain of nearly 18%.
While evidence that AI has an information advantage in stock selection has yet to be proven, Rosenbluth said that there are advantageous indicators when comparing AI-guided funds to their flagship competitors.
"AMOM is significantly outperforming the iShares momentum ETF (MTUM)," he said.
The iShares MSCI USA Momentum Factor ETF is rebalanced every six months, although the standard time period used to calculate the relative strength index (RSI) momentum indicator is 14 days. The AI-driven AMOM rebalances at the end of every month and is up more than 21% this year, while the benchmark MTUM has remained relatively flat in 2023.
"'[Momentum ETFs] should benefit from the information that's continually being updated in the marketplace," Rosenbluth said.
