introduction
Welcome to the 2022 US Investment Olympiad Qualifying Round.
The goal of the games is easy: beat the S&P 500, either by generating higher returns or by playing dirty and looking for higher risk-adjusted returns.
Let the games begin!
Qualifications
Just just like the 2022 Winter Olympics in Beijing, qualifying for the US Investment Olympics shouldn’t be easy. Mutual funds are mechanically excluded from participation: their fees are just too high to realistically compete against the S&P 500. Hedge funds have even higher fees and, in theory, ought to be hedged so that they cannot compete with the stock market either. In fact, exchange-traded funds (ETFs) are the one securities that may sustain with the index.
So far there are eight ETF candidates representing three themes:
- Smart Money (GVIP, GURU, GFGF and ALFA): These ETFs mimic the trades of famous investors and mutual and hedge fund managers. Their offer is high alpha with low fees.
- Crowd Intelligence (BUZZ and SFYF): Stock selection relies on the wisdom and sentiment of the group.
- Artificial Intelligence (AI, AIEQ and QFRT): The stocks in these ETFs are chosen by AI programs. In the case of AIEQ, IBM’s famous company decides.
While the ETFs are cheaper than the typical mutual or hedge fund, they’ve fees of 64 basis points (bps) and are usually not low cost in comparison with low-cost index trackers. However, first-class performance doesn’t come without spending a dime.
Despite their topical themes, our ETFs haven’t yet gained widespread traction among the many investing community. Their cumulative assets under management (AUM) is just $700 million, although some track records date back to 2012. But who doesn’t love rooting for the underdog?
Smart Money, Crowd Intelligence and AI ETFs AUM, in US Millions
Smart Money, Crowd Intelligence and AI ETFs: Performance
How did our eight ETFs perform in comparison with the S&P 500? We created equally weighted indices for the three groups, with Smart Money’s track record going back to 2012, AI’s track record going back to 2016, and Crowd Intelligence’s track record going back to 2019.
Since everyone invests in US stocks, all of them performed in keeping with the S&P 500. Some have outperformed the benchmark once in a while, but not consistently. The judges aren’t particularly impressed.
Outperform the S&P 500: Smart Money, Crowd Intelligence and AI ETFs
Of course, just like the world of finance, the Olympics are all about data and details. Looking on the graph of an investment shouldn’t be a very scientific approach to evaluating performance. The judges need to know what sort of alpha our competitors have generated since their inception. Smart Money delivered negative alpha of -3.0% per 12 months since 2012, Crowd Intelligence -7.2% per 12 months since 2019 and AI -0.9% since 2017.
A cynic might say that smart money shouldn’t be so smart, the masses are usually not so smart, and AI shouldn’t be so intelligent.
Alpha Generation: Smart Money, Crowd Intelligence and AI ETFs
Better in danger management?
But before we remove all of those participants from medal competition, our judges will examine their risk management characteristics. Our ETFs may not have the longest track record, but they’ve all experienced the last major stock market shock: the COVID-19 crisis. How did they do it?
Smart money and crowd intelligence fell greater than the S&P 500 in March 2020, while AI performed barely higher. Maybe humans are overrated and AI is healthier in danger management?
Fewer disadvantages? Maximum payouts in the course of the 2020 COVID-19 crisis
Although smaller drawdowns may help investors keep on with an investment strategy, they are usually not particularly helpful metrics on their very own. Finally, money would outperform even in a declining market, nevertheless it is unlikely to outperform the benchmark over time. Therefore, judges turn to risk-adjusted returns and the Sharpe ratio.
AI beat smart money and crowd intelligence, but none of our competitors achieved higher Sharpe ratios than the S&P 500. That means none of them qualify for advancement.
Better risk-adjusted returns? Sharpe Ratios, 2019-2021
More thoughts
Although these ETFs had different flavors, they exhibited similar behavior: the truth is, all of them outperformed the S&P 500 in 2020. The query is why.
An element exposure evaluation shows that they’ve almost an identical exposures: negative exposure to value and positive exposure to the scale and momentum aspects. Our competitors were all chubby and outperformed small cap growth stocks.
Smart money investors like hedge funds may not realize that the masses are taking the identical risk as them. And all of them may be surprised that AI ETFs do the identical.
The right factor exposure may help outperform the S&P 500 over time, but shouldn’t be much like alpha. In fact, it is the investment world’s equivalent of doping. Especially once they are hidden in themed products.
Although it will not have mattered on this round, it will have been grounds for disqualification.
So far, the S&P 500 has outperformed the sector.
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