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HomeInvestmentThe US Funding Olympics: Good Cash, Crowd Intelligence, and AI

The US Funding Olympics: Good Cash, Crowd Intelligence, and AI


Welcome to the qualifying spherical of the 2022 US Funding Olympics.

The aim of the video games is straightforward: beat the S&P 500, both by producing greater returns or enjoying soiled and going for greater risk-adjusted returns. 

Let the video games start!


Just like the 2022 Winter Olympics in Beijing, the US Funding Olympics are usually not straightforward to qualify for. Mutual funds are robotically barred from participation: Their charges are simply too excessive for them to have a sensible shot towards the S&P 500. Hedge funds have even greater charges and theoretically needs to be hedged, to allow them to’t compete with the inventory market both. In reality, the one securities able to matching the index are exchange-traded funds (ETFs).

Thus far, there are eight ETF contestants representing three themes:

  • Good Cash (GVIP, GURU, GFGF, and ALFA): These ETFs mimic the trades of well-known traders and mutual and hedge fund managers. Their pitch is excessive alpha at low charges.
  • Crowd Intelligence (BUZZ and SFYF): Shares are chosen primarily based on the knowledge and sentiment of the gang.
  • Synthetic Intelligence (AI, AIEQ and QFRT): The equities in these ETFs are chosen by AI packages. Within the case of AIEQ, IBM’s well-known Huge Watson makes the picks.

Though cheaper than the common mutual or hedge fund, the ETFs have charges of 64 foundation factors (bps) and are usually not low cost in comparison with low-cost index trackers. However then once more, top-notch efficiency isn’t free.

Financial Analysts Journal Current Issue Tile

Regardless of their modern themes, our ETFs have but to resonate a lot with the funding neighborhood. Their cumulative property underneath administration (AUM) are solely $700 million, though some have observe information going again to 2012. However then once more, who doesn’t love cheering for the underdog?

Good Cash, Crowd Intelligence, and AI ETFs AUM, in US Tens of millions

Chart showing Smart Money, Crowd Intelligence, and AI ETFs: Assets under Management, Millions
Supply: FactorResearch

Good Cash, Crowd Intelligence, and AI ETFs: Efficiency

So how did our eight ETFs fare towards the S&P 500? We created equal-weighted indices for the three teams, with Good Cash’s observe file going again to 2012, AI’s to 2016, and Crowd Intelligence’s to 2019.

Since all spend money on US shares, all of them carried out consistent with the S&P 500. Some have overwhelmed the benchmark once in a while however not persistently. The judges are usually not particularly impressed.

Outperforming the S&P 500: Good Cash, Crowd Intelligence, and AI ETFs

Chart showing Outperforming the S&P 500: Smart Money, Crowd Intelligence, and AI ETFs
Supply: FactorResearch

In fact, the Olympics, like finance, is all about information and particulars. Eyeballing an funding’s chart shouldn’t be a very scientific strategy to efficiency analysis. The judges need to know what kind of alpha our rivals have generated since their inception. Good Cash yielded a detrimental alpha of -3.0% every year since 2012, Crowd Intelligence -7.2% per 12 months since 2019, and AI -0.9% since 2017. 

A cynic would possibly say the sensible cash isn’t that sensible, the gang not that smart, and AI not that clever.

Alpha Era: Good Cash, Crowd Intelligence, and AI ETFs

Chart showing Alpha Generation: Smart Money, Crowd Intelligence, and AI ETFs
Supply: FactorResearch

Higher at Threat Administration?

However earlier than eliminating all these contestants from medal competition, our judges look at their risk-management traits. Our ETFs could not have the longest observe information, however all of them skilled the final extreme inventory market shock: the COVID-19 disaster. So how did they do?

Good Cash and Crowd Intelligence fell additional than the S&P 500 in March 2020, whereas AI did marginally higher. Maybe people are overrated and AI is best in danger administration?

Much less Draw back? Most Drawdowns throughout 2020 COVID-19 Disaster

Chart showing Less Downside? Maximum Drawdowns during 2020 COVID-19 Crisis
Supply: FactorResearch

Though decrease drawdowns could assist traders persist with an funding technique, on a stand-alone foundation, they don’t seem to be particularly useful metrics. In any case, money would outperform in a down market too, however it’s unlikely to beat the benchmark over time. So the judges flip to risk-adjusted returns and the Sharpe ratio.

AI beat Good Cash and Crowd Intelligence, however none of our contenders generated greater Sharpe ratios than the S&P 500. Meaning none of them qualify to advance.

Higher Threat-Adjusted Returns? Sharpe Ratios, 2019–2021

chart showing Better Risk-Adjusted Returns? Sharpe Ratios, 2019–2021
Supply: FactorResearch

Additional Ideas

Though these ETFs had distinct flavors, they exhibited related conduct: In reality, all of them outperformed the S&P 500 in 2020. The query is why.

An element publicity evaluation reveals that they’ve virtually similar exposures: detrimental publicity to worth and constructive publicity to the dimensions and momentum components. Our rivals had been all obese outperforming small-cap progress shares.

Ad for Bursting the Bubble

Good cash traders like hedge funds could not admire that the gang is selecting up the identical danger publicity as they’re. And so they all could be shocked that the AI ETFs are too. 

The correct issue publicity will help outperform the S&P 500 over time, nevertheless it doesn’t resemble alpha. In reality, it’s the funding world equal of doping. Particularly when hidden inside thematic merchandise.

Although it wouldn’t have mattered on this spherical, it could have been trigger for disqualification.

To date, the S&P 500 is thrashing the sphere.

For extra insights from Nicolas Rabener and the FactorResearch staff, join their electronic mail publication.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the writer’s employer.

Picture credit score: ©Getty Photos / imagedepotpro

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