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German bank Baader to launch ‘AI-enhanced’ active ETF
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German bank Baader is entering the exchange-traded fund market with a strategy that will use artificial intelligence to aid stock selection.
Baader’s investment management arm plans to launch ‘AI-enhanced’ Eurozone equity program ETFs which will be traded on the Xetra exchange in Frankfurt, according to the fund supplement.
The Irish-domiciled ETF will use “a holistic AI-driven stock selection model” to generate higher returns than a Eurozone stock index developed by MSCI.
The model was designed by Ultramarin, a specialist AI investing company, to predict the monthly excess return of each stock in the Eurozone stock investment universe.
The fund is expected to launch later this month, according to the regulatory filing, but Ultramarin said Xetra’s listing was still awaiting approval from Germany’s financial regulator.
Ultramarin is also developing AI-enhanced ETFs focused on global and U.S. stocks, and its technology is already available in three mutual funds, according to its website.
A senior Goldman Sachs executive sits on the board of directors of the ETF’s umbrella fund.
Sailesh Pradhan is Head of Client Services for Europe, Middle East and Africa at Goldman Sachs ETF Accelerator, a white label business. facility in 2022 which has not yet launched its first funds in Europe.
Goldman declined to say whether the ETF accelerator helped develop the AI-enhanced fund, but a person with knowledge of the matter said Goldman’s asset management business was not involved.
This article was previously published by Set Europe on firea title belonging to the FT group.
Baader’s ETF follows recent AI-assisted mutual fund launches by Lazard Asset Management and Pictet Asset Management, while WisdomTree is among companies to have launched similar ETFs in the US.
Kenneth Lamont, senior research analyst at Morningstar, said the fund would be the first active ETF in Europe to “rely so heavily on AI” to pick stocks.
But he said the fund “screams of over-engineering.”
“The obvious holy grail here is that an AI strategy can leverage huge and diverse data sets to glean unique investment insights and provide consistent alpha to investors,” he said.
“The obvious downside here is the lack of live experience and lack of transparency.”
Lamont added that transparency was one of the strengths of ETFs and that although the Baader fund provided daily holdings, its “black box approach” meant it was not possible to know why a given stock was held at the specified weighting.
“Investors trying to decipher the strategy will soon get lost in a tangle of models and data sets at different levels,” he said.
“I have no doubt that AI will play an increasing 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 the use of AI for stock picking was “a natural evolution” in the use of quantitative analysis.
He said that while AI would not replace human fund managers, it would help them perform more detailed quantitative analyzes to identify suitable securities for their portfolios.
“Using AI to determine the constituents of rules-based portfolios like ETFs or passive indices is the next logical step,” Glow said.
But he added that the final decision on whether to include a stock in a portfolio or index had to be made by a human, because the AI was not able to verify the data fed to it .
“AI takes the data it receives for granted for calculations, even though the data may be meaningless due to a data error,” he said.
Baader did not respond to requests for comment.
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