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HomeETF NewsExplaining The “Robot” ETF’s Bull Run With Factor Analysis

Explaining The “Robot” ETF’s Bull Run With Factor Analysis

Bloomberg last week published an intriguing story about a new exchange traded fund (ETF) that uses artificial intelligence (AI) to outperform market indexes and active managers alike. The implication: a new era of AI-driven investing has dawned, putting the standard applications of indexing at a disadvantage. Yet a closer look at the so-called Robot ETF’s results via a factor-analysis lens tells a different story and one that can be explained with a mix of large-cap, small-cap and micro-cap equity betas. In turn, replicating the Robot ETF’s performance, which Bloomberg claims “leaves pros in the dust,” is a simple matter of holding a trio of plain-vanilla index funds.

To be fair, the Bloomberg article notes that the AI Powered Equity (AIEQ) has a healthy dose of small-cap bias. But we’re also told that the ETF uses IBM’s Watson platform, an AI system that’s deployed 24/7 to analyze “more than 6,000 US public companies each day before picking about 100 of them to own.” Impressive, but running a factor analysis on the fund suggests there’s an easier and more accessible methodology for achieving the same performance – with modestly lower risk.

As a test, let’s assume that the AIEQ’s returns can be largely explained by three equity betas, as proxied by a trio of the following conventional US stock ETFs:

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