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Rise of the machines: Canada’s first AI-run ETF set to hit the market

The ETF can analyze huge data sets to solve problems.

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Portfolio management duties are now being handed over to robots as Canada's first artificial intelligence (AI) exchange-traded fund hits the market on Nov. 1.

With the ticker MIND, Horizons ETFs Management (Canada) Inc. is set to launch the Horizons Active A.I. Global Equity ETF – an actively managed investment strategy entirely run by an AI system that extracts patterns from analyzing data.

The ETF, subadvised by Mirae Asset Global Investments, will provide investors with exposure to major global equity indexes using a basket of primarily North American-listed ETFs; index exposure is determined by AI stock-picking.

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MIND is able to evaluate and narrow down an investment base of 32 global equity ETFs to between five to 20 ETFs it will invest in. With a management fee of 0.55 per cent, the ETF uses technology that is able to support algorithms that can gather information and analyze enormous data sets to solve problems.

"As ETFs continue to proliferate, we see more investors asking about ETFs that provide exposure to multiple asset classes that go beyond a single sector, country or region; we anticipate this will be another big growth area of product development in the ETF space," says Steve Hawkins, president and co-chief executive officer of Horizons ETFs. "An ETF driven solely by an A.I. has the advantage of interpreting millions of market data points in seconds, and will make investment decisions free of any human emotion, in the most efficient and effective manner for its portfolio."

Designed by Qraft Technologies, a financial technology firm based in South Korea, the initial framework of the AI programming monitors more than 50 investment metrics including money flow, six-month relative performance, 90-day volatility, beta and 80-day simple moving average.

AI technology generally has a learning curve – it needs to learn how to invest in the universe of securities that it is seeking to outperform. For this reason, Horizons developed a 10-year back-test of live investment data for the AI program to begin to teach itself how to optimally invest. In addition, the AI portfolio will be rebalanced on a monthly basis – rather than quarterly – allowing greater asset allocation flexibility to change the asset mix of the portfolio on a more frequent basis.

The key benefit for investors of an AI system that controls the entire investment selection is the elimination of human emotion or investor biases affecting decisions, ensuring a disciplined approach to investing, says Junhee Seok, a professor at the school of electrical engineering at Korea University who helped develop the AI technology. "[It] can make a significant change in the investment, and is able to cover the weaknesses of human intelligence which includes emotional decisions, as well as human error that can occur," Prof. Seok says.

Prof. Seok doesn't believe AI will replace all the tasks of a human portfolio manager and says there does still need to be some minimal human oversight to monitor events that would occur in the "face to face" network that may not be online for the AI system to immediately detect.

MIND does have minimal human interaction, as all trade executions are completed by Horizon staff.

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A similar ETF launched last month in the U.S. The AI Powered Equity ETF (ticker AIEQ) uses IBM's Watson supercomputing technology to analyze data for approximately 6,000 U.S.-listed equities as well as regulatory filings, quarterly results, news articles and social media posts. The AI technology is able to distill this for the fund into 30 to 70 companies with the greatest potential for appreciation.

"ETFs have made beta 'smart,' but with AIEQ we're looking to make investing intelligent," said Chida Khatua, CEO and co-founder of the fund creator EquBot LLC, in a statement last month. "EquBot AI Technology with Watson has the ability to mimic an army of equity research analysts working around the clock, 365 days a year, while removing human error and bias from the process."

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About the Author
Globe Investor Reporter

Clare O’Hara is a reporter at The Globe and Mail. Prior to that, Clare spent eight years as a staff writer at Investment Executive, a national newspaper for financial service industry professionals. More

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