This Week's ETF Launches: iShares Gets “Evolved” With New Machine Learning ETFs

Artificial intelligence is quickly becoming something that impacts our everyday lives.

It’s being used in robots that can do everything from building machines to driving cars to performing delicate surgeries. It’s emerging in the financial world as well. We’ve got ETFs that focus on companies using AI and we’ve got an ETF that is using AI to make investment decisions. Given these developments, it was just a matter of time before one of the major providers got in on the action.

Here are this week’s new fund launches:

For a list of all new ETF launches, take a look at our ETF Launch Center.

BlackRock’s iShares ETF lineup is known for its variety of ultra-low-cost passively-managed options, but, this week, it adds seven funds that are a major deviation from that theme. The “Evolved” group of funds are actively-managed and use data science and machine-learning tools in order to categorize and choose companies for their portfolios.

The Evolved methodology also introduces 12 classifications of companies instead of the GICS standard of 10 and allows companies to qualify for more than one category. CVS Health Corporation (CVS) is used as an example in the company’s literature. GICS categorizes the company in the consumer staples group, but it, obviously, also has a big presence in the healthcare space. Evolved places CVS not only in the consumer staples group, but also in its new healthcare staples category. The methodology is designed to provide a more accurate assessment of company exposure within the economy. To determine where companies should go, data science, word recognition, speech patterns and other artificial intelligence technology is used. It represents BlackRock’s first major foray into the AI space.

All seven ETFs carry an expense ratio of 0.18%, which makes them competitive with most ETFs in the marketplace and far cheaper than just about any actively-managed product.

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Insurance giant Nationwide has enjoyed some success with the first set of ETFs that it launched in September 2017. Already, each fund has surpassed $100 million in total assets and now it hopes to enjoy similar success with its latest offering, the Nationwide Maximum Diversification Emerging Markets Core Equity ETF (MXDE B-).

The fund’s underlying index, the TOBAM Maximum Diversification Emerging Markets Index, looks to build its portfolio using its proprietary Diversification Ratio methodology. Instead of investing in a large number of stocks to achieve diversity, it analyzes each company’s volatility and correlation with each other in order to diversify away as much risk as possible, while still allowing the opportunity for market-beating returns. Companies with a higher Diversification Ratio receive greater weighting in the portfolio. In addition to standard screens for factors, such as liquidity and market cap, the index runs companies through a socially responsible investing screen as well.

Investing in dividend aristocrats is a popular income-generating strategy since it tends to provide predictable dividend growth over time. One of its chief criticisms, however, is that yields are often low. The debut ETF from CBOE Vest looks to address that problem by layering on a covered call strategy to the aristocrat portfolio.

The CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG B+) starts with an equal-weighted portfolio of the optionable stocks in the S&P 500 Dividend Aristocrats Index, while writing covered calls for a partial amount on each stock. The goal of the fund is to produce a yield 3% higher than that of the S&P 500.

The Breakwave Dry Bulk Shipping ETF (BDRY C) launches this week to provide investors exposure to the daily change in the price of dry bulk freight futures. The portfolio consists of a three-month strip of the nearest calendar quarter futures contracts on specified indices that measure rates for shipping dry bulk freight. The use of futures instead of stocks tend to make the fund more expensive, as evidenced by the 1.72% expense ratio.

Most real estate-focused ETFs use market-cap weighting in building their portfolios, but the U.S. Diversified Real Estate ETF (PPTY B-) puts a little twist on its fund. It uses property location as a primary selection factor. This will allow shareholders to target more specific markets with their real estate investments. PPTY also gives a long look at a REITs leverage ratio and tends to avoid those with high debt levels.

While there are already ETFs out there that are run by machines, the iShares Evolved lineup is the biggest entrance into the space made by a major player yet. Capturing the buzz of machine learning coupled with a unique company classification strategy and low fees should make these products successful. PPTY also has the look of an intriguing product as its market-centric approach should appeal to an industry focused on location.

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