Most investors are familiar with Renaissance Technologies and its impressive 30-year track record, generating a 66% annualized return before fees. These successes came from quantitative trading strategies making short-term predictions based on statistical probabilities – methods that have become much more popular since the 1980s.
Harnessing breakthroughs in artificial intelligence, asset managers like Kaiju ETF Advisors are bringing these strategies to retail investors via exchange-traded funds. Recently, the firm launched the actively managed BTD Capital Fund (DIP) based on proprietary artificial intelligence algorithms developed by a diverse group of physicists, mathematicians, and data scientists.
Let’s take a look at how the new active ETF from Kaiju ETF Advisors works and other AI-powered ETFs for investors interested in the nascent space.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
How the Strategy Works
The BTD Capital Fund (DIP) starts with a universe of U.S.-listed stocks from the S&P 500 and NASDAQ 100 indexes. Then, the fund’s proprietary AI algorithms analyze more than 25 factors to purchase assets when they’re oversold and sell them when the market value rebounds. And investors pay just a 1.25% expense ratio, which is far lower than hedge funds.
The fund holds anywhere from 20 to 40 stocks, and the portfolio turns over an average of 10% to 30% daily. As a result, the average holding period for any individual stock is two to seven trading days. These short holding times mean shareholders have limited market risk, although the fund holds most positions overnight.
Investors may consider the fund to provide equity exposure with the opportunity to outperform the S&P 500 index while minimizing downside risk. However, the fund remains new, and there’s limited historical data to compute popular risk metrics, such as standard deviations or Sharpe Ratios. As a result, investors should exercise some caution.
Alternative AI ETFs
Kaiju ETF Advisors isn’t the only asset manager launching artificial intelligence-enhanced funds.
For instance, Qraft Advisors also offers AI-enhanced, actively managed ETFs. In particular, the asset manager looks at quality, size, value, momentum, and low volatility factors and uses machine learning to find combinations of factors that impact the market. After finding a strategy, it backtests and forward-tests the strategy to assess its performance.
Currently, Qraft offers three actively managed ETFs:
- Qraft AI-Enhanced U.S. Large Cap ETF (QRFT)
- Qraft AI-Enhanced U.S. Large Cap Momentum ETF (AMOM)
- Qraft AI-Enhanced Next Value ETF (NVQ)
Meanwhile, Merlyn takes a fund-of-funds approach to predict sector rotation using AI algorithms. Its SectorSurfer Momentum ETF (DUDE) seeks to hold six momentum-leading ETFs, including four in economic sectors and two in geopolitical sectors. And its Bull-Rider Bear-Fighter (WIZ) ETF takes a similar approach to tactical ETF allocations.
And finally, ETFMG’s AI-Powered Equity ETF (AIEQ) uses IBM Watson to analyze millions of data points across news, social media, analyst reports, and financial statements to make fundamental investment decisions. So far this year, the fund is up more than 11% compared to a modest 3.6% gain in the broader S&P 500 SPDR ETF (SPY).
The Bottom Line
Statistical arbitrage and other quantitative strategies have been around since the 1980s, but breakthroughs in artificial intelligence are opening the door to new opportunities for retail investors. For instance, the BTD Capital Fund (DIP) makes it easy for investors to buy the dip using AI-enhanced strategies to capitalize on short-term opportunities.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
