Artificial intelligence (AI) and machine learning have a variety of applications across a wide array of industries, including financial services.
In fact, WisdomTree is tapping AI to bring a fresh look to a pair of new value exchange traded funds born out of two previous funds in the issuer’s lineup. The WisdomTree U.S. Dividend ex-Financials Fund (DTN ) is now the WisdomTree U.S. AI Enhanced Value Fund (AIVL ), while the WisdomTree International Dividend ex-Financials Fund (DOO ) is reborn as AIVL’s international counterpart, the WisdomTree International AI Enhanced Value Fund (AIVI ).
Whereas traditional value funds are often linked to indexes and focus heavily on a small number of sectors, the pair of new actively managed funds from WisdomTree tap into Voya Equity Machine Intelligence (EMI), a fundamentally based machine learning strategy.
“The EMI model approaches value investing dynamically to avoid narrow style biases that may be out of favor, while still providing value exposure across equities,” says WisdomTree analyst Blake Heimann. “The strategy seeks to capitalizes on short- and long-term investment opportunities—in an effort to deliver the virtue of patience and agility, acting quickly and decisively when opportunities arise.”
AIVL, which holds nearly 100 stocks as of January 14, arrives at a time of optimism for domestic value stocks. That’s the case because value stocks are credibly inexpensive today, and because expectations of rising interest rates are weighing on growth stocks to start 2022.
Of course, those are positives. So is the methodology employed by AIVL and AIVI. The new WisdomTree ETFs don’t simply look for stocks that are inexpensive on the basis of price-to-earnings and price-to-book ratios. Rather, the funds are based on an intensive process that starts with data-rich bottom-up research and employs scaling of analyst research, AI-based stock selection, and a combination of human and virtual portfolio management. In fact, the first step introduces environmental, social, and governance (ESG) considerations into the equation. That’s not common among value ETFs.
“The result of this step is approximately 250 features spanning ESG, company financials, macro indicators and company sentiment. Trained on 20 years of these historical features, the virtual analysts (the true AI) identify companies for inclusion in the portfolio based on learned patterns,” adds Heimann.
Both AIVI and AIVL could be suitable for investors looking for alternatives to traditional value funds and those looking for unique alpha-generating approaches at a time when value is in style and alpha is hard to come by.
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