AI-Powered ETF Favoring Cyclicals

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AI-Powered ETF Favoring Cyclicals

Today we have one of our occasional updates on AIEQ, a US exchange traded fund that uses IBM Watson-powered AI to make its investment decisions. Before we get started, just a quick reminder that we own a small position in this product ourselves, but otherwise have no affiliation with the fund, its sponsor, or anyone else associated with it.

Given that money continues to oscillate between growth stocks and reopening trades, we wanted to check in on what “the machine” behind AIEQ’s investment positions currently favors. Especially since it’s had a solid track record versus the broader equity market since stocks bottomed one-year ago today. For example:

  • 2021 year-to-date return for AIEQ: +6.8 pct
  • S&P 500 YTD: +4.1 pct
  • 1-year return for AIEQ: +92.0 pct
  • S&P 500 1-year: +74.8 pct

While there’s no manager to ask why certain stocks are in the portfolio since the fund uses proprietary algorithms to pick its investments, here’s what the algo currently likes in terms of AIEQ’s top ten holdings by weight:

  • Applied Materials (AMAT): 4.6 pct
  • Alphabet (GOOGL): 2.8 pct
  • Moderna (MRNA): 2.8 pct
  • Mosaic (MOS): 2.5 pct
  • Apple (AAPL): 2.5 pct
  • Advanced Micro Devices (AMD): 2.2 pct
  • Roku (ROKU): 2.1 pct
  • Intel (INTC): 2.0 pct
  • Etsy (ETSY): 1.9 pct
  • Sunpower (SPWR): 1.9 pct
  • Total top 10: 25.3 pct

A few points on this:

#1: Here are the biggest changes in the top ten holdings since we last wrote about AIEQ on January 25th:

  • New additions to the top 10: Mosaic (fertilizer), Apple, Intel
  • Names that dropped out of the top 10: Tesla, Enphase Energy, Square

Takeaway: some disruptive companies have fallen out of AIEQ’s top ten holdings over the last two months, including Square, Tesla (which had held the #1 spot), and Enphase (solar inverter company). SunPower also moved from the 2nd spot down to the 10th (also solar power hardware). By contrast, less speculative and highly profitable tech names (i.e. Alphabet, Apple, Intel) moved higher into or within the top ten. The upshot: AIEQ is still tech heavy, but certainly less spicy than when we looked in January.

#2: Given that AIEQ is the AI Powered ETF, we sometimes look at which of its top 10 positions overlap with the Ark Innovation ETF (ARKK), the human-powered active ETF much in the news. The answer towards the end of last January was Tesla, Roku and Square. Now, it is just one, Roku. While TSLA dropped from the 1st to 12th spot for AIEQ since then, TSLA is not only still the top holding in ARKK but its weighting increased from 9.0 pct to 10.5 pct over that timeframe.

Takeaway: ARKK continues to favor riskier names as opposed to AIEQ over the last two months. That’s worked better for the latter fund, as AIEQ is up 6.8 pct year-to-date versus down 2.2 pct for ARKK. We’ll still give credit where it is due, however: ARKK is up 217.3 pct over the last year versus +92.0 pct for AIEQ.

#3: While AIEQ still maintains noticeable tech exposure, one new name stood out to us within the top 15 holdings: Bank of America, which was not there in late January. If a consumer-heavy bank is now able to grab the 13th holding in tech tilted AIEQ, we wondered what other “reopening trades” the “machine” currently favors enough to include in its rather concentrated portfolio of just 167 names. Here are some examples using a cutoff weight of 0.50 pct:

  • Bank of America (BAC): 1.4 pct
  • Cimarex Energy (XEC): 1.3 pct
  • Ford (F): 1.3 pct
  • Uber (UBER): 1.2 pct
  • Host Hotels & Resorts (HST): 1.1 pct
  • Disney (DIS): 0.94 pct
  • Diamondback Energy (FANG): 0.90 pct
  • First Republic Bank (FRC): 0.88 pct
  • Exxon Mobil (XOM): 0.85 pct
  • Sabre Corp (SABR): 0.81 pct
  • Zions Bancorporation (ZION): 0.76 pct
  • Vornado Realty Trust (VNO): 0.73 pct
  • Caterpillar (CAT): 0.60 pct
  • TCF Financial Corp (TCF): 0.54 pct

Takeaway: we’re not making stock recommendations here, but if you’re looking for reopening trades to research this is a list of names that an algorithmic model with a record of success currently likes.

Bottom line: AIEQ has lightened up on disruptive tech names, maintains solid exposure to highly profitable and less speculative tech companies, and is increasing exposure to cyclicals. As simple as this approach may seem, AIEQ has clearly embraced what’s been working over the last couple of months by shifting towards name brand cyclical trades while holding on to less risky tech.