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Germany's Baader Bank is entering the exchange-traded fund market with a strategy that uses artificial intelligence to help with stock selection.
Bader's investment management unit plans to launch an “AI-enhanced” eurozone equity ETF that will trade on Frankfurt's Xetra exchange, according to a supplemental document for the fund.
The Ireland-based ETF plans to use a “comprehensive, AI-driven stock selection model” to generate returns that outperform a eurozone stock index developed by MSCI.
The model was designed by AI investment specialist Ultramarin and predicts the monthly excess returns of each stock in a Eurozone equity investment target.
The fund is due to launch later this month, according to regulatory documents, but Ultramarine said Xetra's listing was still pending approval from German financial regulators.
Ultramarine is also developing AI-enhanced ETFs focused on global and U.S. stocks, and its technology is already available for three mutual funds, according to its website.
Senior Goldman Sachs executives serve on the boards of the ETF's subsidiary funds.
Sailesh Pradhan is head of client services for Europe, the Middle East and Africa at Goldman Sachs ETF Accelerator, a white-label business set up in 2022 that is yet to launch its first fund in Europe.
Goldman declined to comment on whether the ETF Accelerator helped develop the AI-powered fund, but a person familiar with the matter said Goldman's asset management business was not involved.
This article was previously published in Ignites Europe, a magazine owned by the FT Group.
Bader's ETF follows recent launches of AI-assisted mutual funds by Lazard Asset Management and Pictet Asset Management, while WisdomTree is one of the firms to have launched a similar ETF in the US.
Morningstar senior research analyst Kenneth Lamont said the fund would be Europe's first active ETF “that relies heavily on AI” to select stocks.
But he said the fund was “over-designed.”
“The obvious ultimate goal here is for AI strategies to be able to leverage vast and diverse data sets to glean unique investment insights and deliver consistent alpha to investors,” he said.
“The obvious flaw here is the lack of real track record and the lack of transparency.”
Lamont added that transparency is one of ETFs' strengths, and that the Bader Fund provides daily holdings, but its “black box approach” makes it impossible to know why certain stocks are held in particular proportions.
“Investors trying to unravel this strategy will quickly find themselves lost in a web of different layers of models and data sets,” he said.
“AI will undoubtedly play an increasingly important role in fund management, but investors considering it should remember the old investment adage: 'If you don't understand it, don't invest in it.'”
Detlef Groh, head of research for Europe, the Middle East and Africa at LSEG Lipper, said using AI for security selection was a “natural evolution” in the use of quantitative analysis.
He said AI won't replace human fund managers, but it will help them carry out more in-depth quantitative analysis to identify suitable securities for portfolios.
“Using AI to determine the components of rules-based portfolios like passive ETFs and indexes is the next logical step,” Groh said.
However, he added that AI cannot verify the data it is given, so the final decision on whether to include a security in a portfolio or index must be made by a human.
“AI takes for granted the data it receives for its calculations, even though data errors may make the data meaningless,” he said.
Bader did not respond to a request for comment.
Ignites Europe is an FT Specialist news service aimed at professionals working in the asset management industry. Trials and subscriptions are available below. Source
