Late to the Party

For all the hype about AI's untapped potential in the stock market, its real life debut across various stock portfolios has failed to impress.

The Wall Street Journal reports that there are already at least 13 exchange-traded funds (ETFs) being managed by an AI, and ironically, almost none of them bet on this year's surge of the benchmark S&P 500 index, which tracks 500 of the largest companies listed on the US stock exchange  — a surge which was significantly driven by the boom in AI.

To put it bluntly: these AI-managed ETFs didn't even cash in on their underlying tech's own hype.

Eric Ghysels, an economics professor at the University of North Carolina at Chapel Hill, noted that while an AI can be speedier than human investors moment-to-moment, it's sluggish to adapt to "paradigm-shifting events" like the war in Ukraine — or maybe even the rise of AI.  Meaning, in his opinion, an AI can't beat human investors over time.

"Maybe one day it will, but for now AI is limited to plagiarizing history," Ghysels told the WSJ.

Watson's Wager

A look at the oldest AI-run portfolio, the AI Powered Equity ETF (AIEQ), seemingly backs up Ghysel's thinking.

AIEQ is powered by IBM's Watson AI, calculating its bets based on millions of data points gathered from the news, analyst reports, and even social media. Yet according to the WSJ's analysis, AIEQ, while far from a disaster, is still drastically underperforming.

Since its launch in 2017, AIEQ has had a return of 44 percent. In that same period, the ETF based on the S&P performance, SPY, boasted a return of a whopping 93 percent, blowing AIEQ's gains out of the water.

A 44 percent return isn't bad on its own, but for stock traders wanting to be on the cutting edge, lagging behind the market at large isn't going to, well, cut it.

In AIEQ's case, as Ghysel predicted, the long term sees out AI-run fund management's pitfalls: it enjoyed an initial but short-lived lead on the S&P, but it absolutely tanked after the Federal Reserve raised interest rates last year. This year it's up nine percent, still behind the S&P's fifteen.

Staying out of IT

Harnessing all that technology just to perform worse than one of the most popular and no-brainer ETFs in the world doesn't scream game-changer.

Of course, AI has a very plausible potential to improve over time, and some AI-powered portfolios have reportedly outperformed the S&P in the very short term.

Still, to pragmatic investors, waiting for the tech to power up may not be worth the time or money, especially since the likes of ChatGPT have shown how often AI can get it wrong.

"I think mistakes are going to be made early on, and I don't really want to be part of those mistakes," Jack Butler, a business advisor, told the WSJ.

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