How AI could end the ETF boom
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The number of ETFs in the U.S. is fast approaching the number of stocks. If anything can put an end to that trend, it's artificial intelligence.
Why it matters: With AI, it will soon be easier to create your own strategy than it will be to find an ETF designed to follow that strategy.
Driving the news: Online brokerage Public last week released Generated Assets, a tool that allows you to generate a stock portfolio from an idea.
- Rather than paying an expense ratio of 1.03% for an ETF like YOLO (cannabis stocks) or 0.99% for VICE (sin stocks), a simple chat interface lets investors put together a portfolio along the same lines for free.
- Right now, investors would need to recreate that portfolio manually in their own brokerage account. But later this summer, Public customers will be able to import the strategy and have it periodically rebalance, for a fee that co-CEO Jannick Malling suggests to Axios will be significantly lower.
Between the lines: The small number of massive ETFs that invest in major global indices — the ones which account for the vast majority of total ETF assets — have little to worry about here. Their fees are already rock-bottom and they enjoy enormous economies of scale.
- Beyond those funds, however, lies a huge universe of thousands of much more expensive ETFs that are hard to find and even harder to justify as an investment.
Zoom in: The Generated Assets site provides a chart showing how your portfolio would have compared against the S&P 500 over the last 10 years, but that chart isn't really representative, since it treats the portfolio as static.
- Asking Generated Assets to create an ETF that mirrors the S&P 500 itself, for instance, results in a portfolio that has grown by 3,761% over the past 10 years, compared with 248% for the index.
- That's because it gives a successful company like Nvidia a 5.5% weighting — which is correct for its current market cap, but is orders of magnitude larger than anybody seeking to mirror the S&P 500 would have given it 10 years ago.
- Meanwhile, unsuccessful companies that have dropped out of the S&P 500 are not included at all. Malling tells Axios the brokerage is working on a tool that backtests strategies rather than portfolios.
Zoom out: It's easy to envision a future where agentic AIs can dynamically execute any strategy, for instance "whenever I add new cash to the account, invest it in the stocks where I have the largest capital gains, and then donate the same amount of those stocks to my donor-advised fund, using my lowest-priced tax lots."
- That kind of analysis and execution is much easier for robots than it is for humans.
The bottom line: A lot of financial technologies like index funds are designed to save on the laborious work of, say, buying 500 different stocks in order to put together a diversified portfolio.
- When laborious work becomes free thanks to AI, those technologies will start becoming obsolete.
