When was the last time you tried to buy a mutual fund? Kinda sucks, no? The so-called industry experts tell you to buy an ETF. But how do you make sense out of the myriad of options out there? The fund complexes building ETFs are the same ones that control the mutual fund industry. In fact, just three to four firms control the mutual fund and ETF industries. That doesn’t sounds like a good marketplace for the average investor.
The mutual fund industry is decades old and totally stuck in the past. The way these funds are built, sold and distributed hasn’t changed in over two decades. Sure, the innovation of the ETF (a trade-able open-end fund) was important. But the ETF did nothing to really change the way the business model of these fund complexes work. There are indisputable benefits of investing in mutual funds (and ETFs). But there are much more efficient ways to invest than how it’s currently done.
Enter: advanced artificial intelligence (AI) and multi-factor investing.
How Artificial Intelligence Makes a Difference
Factor investing, along with the advent of AI investing, is transforming the world of investing in Wall Street. Top-performing strategies at leading hedge funds all employ different elements from both technologies. However, only high-net-worth individuals get access to these exciting analytics and strategies. What does that leave for the rest of us? The bare minimum.
The Current Problem
There are obvious reasons to invest in mutual funds and ETFs —from transparency, as fund holdings are publicly available, to liquidity to accessibility.
It’s no secret that diversified exposure to asset classes can get expensive when you buy them individually—which is largely why mutual funds are such a coveted choice among investors seeking stake in sets of securities. These predetermined baskets of sometimes tens of stocks, bonds and other assets offer diversity, mitigating risk in an inevitably volatile market.
Plus, mutual funds trade once a day on the Net Asset Value (NAV) of the entire fund—bought and sold directly with the mutual fund company, which makes mutual funds very hands off. For investors who have neither the time nor the resources to buy individual stocks, access to professional money management is invaluable.
However, mutual fund holdings are only required to be updated on a quarterly basis. And you can’t just buy any mutual funds; you can only buy a fund that has a “distribution agreement” with your brokerage. That doesn’t sound like a true marketplace. You can simply buy an ETF but, in that case, how do you decide which of the thousands is the right choice for you?
While the fund management industry is massive, there’s no differentiation. Instead, actively managed funds typically charge high fees, and they have a storied history of underperforming. Passive funds simply follow market-weighted indices and offer limited differentiation. The fact that there are over 15 US large-cap passive ETFs still puzzles me… I mean how many S&P 500/Russell 1K ETFs do we need before folks believe the market is saturated? The reason investors call the fund-management business an asset-gathering business is because it focuses on growing assets, not on generating awesome returns for customers.
The Solution: AI
AI Investing (and factor investing) is already leveling the playing field. Given the rapid advancements in both these investing technologies, it is possible to create and distribute top-performing strategies through Separately Managed Account (SMAs), which democratizes access and disrupts the feedback loop between fund complexes and our brokerage accounts. The ability to access unique investing strategies investing and trading in ETFs and stocks is now a reality. The same analytics and strategies available to high-net-worth individuals is now available to the average investor.
Q.ai Invest is using advanced forms of Deep Learning and Reinforcement Learning to deliver solutions to investors today to help finally shake up the old school fund management industry. Learn more about Q.ai Invest.