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Germany’s Baader Bank is entering the exchange traded fund market with a strategy that will use artificial intelligence to aid stock selection.
The investment management arm of Baader plans to launch an “AI-enhanced” eurozone equities ETF that will trade on the Xetra exchange in Frankfurt, according to the fund’s supplement.
The Ireland-domiciled ETF will use “a holistic AI-driven stock selection model” to generate returns in excess of a eurozone equity index developed by MSCI.
The model has been designed by Ultramarin, an AI investment specialist company, to predict the monthly excess return for each stock in the investment universe of eurozone equities.
The fund is expected to launch later this month, according to the regulatory document, but Ultramarin said the Xetra listing was still pending approval from Germany’s financial regulator.
Ultramarin is also developing AI-enhanced ETFs focused on global and US equities, and its technology is already available in three mutual funds, according to its website.
A senior Goldman Sachs executive sits on the board of the ETF’s umbrella fund.
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 has yet to launch its first funds in Europe.
Goldman declined to comment on whether the ETF accelerator had helped develop the AI-enhanced fund, but a person with knowledge of the matter said Goldman’s asset management business was not involved.
Baader’s ETF follows the recent launches of AI-assisted mutual funds by Lazard Asset Management and Pictet Asset Management, while WisdomTree is among the 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 “so heavily rely on AI” to select stocks.
But he said the fund “screams ‘over-engineered’”.
“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 clear downside here is a lack of live track record 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 find out why a given stock was held at the specified weight.
“Investors trying to unpick the strategy will soon get lost in a tangle of different layered models and data sets,” he said.
“I don’t doubt that AI will play an increasing role in fund management, but any investor considering this investment should remind themselves of the old investment maxim: ‘If you don’t understand it, don’t invest’.”
Detlef Glow, head of Europe, the Middle East and Africa research at LSEG Lipper, said using AI for securities selection was “a natural evolution” in the use of quantitative analysis.
He said that although AI would not replace human fund managers, it would help them to run more detailed quantitative analyses to identify securities that suited their portfolios.
“The usage of AI to determine the constituents of rule-based portfolios like passive ETFs or indices is the next logical step,” said Glow.
But he added that the ultimate decision on whether a security should be included in a portfolio or index needed to be taken by a human, as AI was not able to verify the data it was given.
“AI takes the data it receives for the calculations for granted, even as the data may make no sense due to a data error,” he said.
Baader did not respond to requests for comment.
Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com
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