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Germany's Baader Bank is entering the exchange-traded fund market with a method that may use artificial intelligence to support stock selection.
Baader's investment management arm plans to launch an “AI-powered” ETF on Eurozone stocks that might be traded on the Frankfurt Xetra stock exchange, based on the fund brochure.
The Ireland-based ETF will use “a holistic, AI-driven stock selection model” to deliver returns above a Eurozone equity index developed by MSCI.
The model was developed by Ultramarin, an organization specializing in AI investing, to predict the monthly excess return for every stock within the Eurozone equity investment universe.
According to the regulatory document, the fund is scheduled to launch this month, but Ultramarin said that listing on Xetra continues to be subject to approval by the German financial regulator.
Ultramarine can be developing AI-powered ETFs focused on global and U.S. equities, and its technology is already available in three mutual funds, based on its website.
A senior Goldman Sachs manager sits on the board of the ETF’s fund of funds.
Sailesh Pradhan is Head of Client Services for Europe, Middle East and Africa at Goldman Sachs ETF Accelerator, a white label company arrange in 2022, which has not yet launched its first funds in Europe.
Goldman declined to comment on whether the ETF accelerator helped develop the AI-powered fund, but an individual conversant in the matter said Goldman's asset management business was not involved.
This article was previously published by Ignite Europea title owned by the FT Group.
Baader's ETF follows recent launches of AI-powered mutual funds by Lazard Asset Management and Pictet Asset Management, while WisdomTree is amongst the businesses which have launched similar ETFs within the US.
Kenneth Lamont, senior research analyst at Morningstar, said the fund can be the primary lively ETF in Europe to “rely so heavily on AI” for stock selection.
However, he said the fund was crying out to be “overdeveloped.”
“The obvious holy grail here is that an AI strategy can leverage huge and diverse data sets to generate unique investment insights and supply consistent alpha to investors,” he said.
“The clear disadvantages are the shortage of current track records and the shortage of transparency.”
Lamont added that transparency is certainly one of the strengths of ETFs and that due to the Baader fund's “black box approach,” while it provides every day holdings, it shouldn’t be possible to search out out why a specific stock is held on the weighting stated.
“Investors attempting to decipher the strategy quickly wander off in a maze of various, complex models and data sets,” he said.
“I actually have little question that AI will play an increasingly necessary role in fund management. But any investor considering this investment should remember the old investment maxim: 'If you don't understand it, don't invest.'”
Detlef Glow, head of Europe, Middle East and Africa research at LSEG Lipper, said using AI for security selection was a “natural evolution” of quantitative evaluation.
He said that while AI cannot replace human fund managers, it could help them conduct more detailed quantitative evaluation to discover securities that fit their portfolios.
“Using AI to find out the components of rules-based portfolios corresponding to passive ETFs or indices is the subsequent logical step,” said Glow.
However, he added that the ultimate decision on whether a security ought to be included in a portfolio or index have to be made by a human, as artificial intelligence shouldn’t be in a position to confirm the info provided to it.
“The AI takes the info it receives for calculations as given, even when they could not make sense resulting from a knowledge error,” he said.
Baader didn’t reply to requests for comment.
