AIVI - AIVI: So Far This AI-Powered ETF Is Underperforming

2023-05-25 10:09:49 ET

Summary

• WisdomTree International Al Enhanced Value Fund uses a proprietary AI model to pick international value stocks.
• AIVI rebranded in early 2022 to take advantage of the AI hype.
• However, since the change in strategy, AIVI has underperformed as a passive international value ETF with lower returns and higher volatility.
• I recommend investors avoid the AI hype for now.

Recently, I wrote an article reviewing the AI Powered Equity ETF ( AIEQ ). While the concept of using artificial intelligence ("AI") to pick stocks is intriguing, I saw no evidence AIEQ's AI model added any 'alpha' relative to a passive market fund like the SPDR S&P 500 ETF Trust ( SPY ).

This article examines another 'AI powered' ETF, this time offered by WisdomTree. The WisdomTree International Al Enhanced Value Fund ETF ( AIVI ) uses a proprietary quantitative AI model to select international value stocks.

Although AI will eventually overtake human analysts and investors, judging by AIVI's underperformance relative to a passive index fund, that day may still be a few years away. I recommend investors stay away from AI hype and stick with tried and true diversification and asset allocation for now.

Fund Overview

The WisdomTree International Al Enhanced Value Fund ETF uses a proprietary quantitative artificial intelligence ("AI") model to select value stocks.

The AIVI ETF has $78 million in assets and charges a 0.58% expense ratio.

Strategy

The AIVI ETF was formerly called the WisdomTree International Dividend ex-Financials Fund ("DOO"), but was rebranded in January 2022 to AIVI (Figure 1).

Instead of focusing purely on the highest dividend-yielding stocks outside of the financial sector within the WisdomTree International Equity Index, the fund's strategy moved to a proprietary AI model supplied by Voya Investment Management Company that seeks to identify persistent patterns in companies' financial data to identify those it expects to outperform. The AI model typically selects lower price-to-book ratio, lower price-to-earnings, and higher free cash flow securities.

The AI model is updated monthly and selects 60-190 equity securities exhibiting the strongest value characteristics mentioned above with the highest potential to outperform, as determined by the AI algorithm. Although individual security weights are determined by overall model scores, individual security weights are capped at 6%. The fund manager may intervene in some circumstances if they believe there are factors that the AI model has not incorporated, such as corporate actions.

Portfolio Holdings

Figure 2 shows the AIVI ETF's portfolio characteristics. Approximately 2/3 of the portfolio is invested in large caps (> $10 billion market cap) and 1/3 in mid caps ($2 to 10 billion). the portfolio has a 5.3% dividend yield, with 11.1x est. P/E and 1.16x P/B.

I believe the most appropriate passive ETF peer for the AIVI ETF is the iShares MSCI EAFE Value ETF (EFV), which focuses on value companies in Europe, Australia, Asia, and the Far East. The EFV ETF is a much larger fund, with $15.2 billion in assets and charges a 0.34% expense ratio.

Figure 3 shows the portfolio characteristics of the EFV ETF. Compared to the EFV, the AIVI ETF has similar portfolio P/B valuations, although AIVI is slightly more expense on a P/E basis. However, AIVI's portfolio also has a higher dividend yield.

Geographically, the AIVI ETF has 22.2% allocation to the U.K., 19.3% allocation to Japan, 8.8% allocation to the Netherlands, 7.9% allocation to Australia and 7.3% allocation to Switzerland (Figure 4).

On the other hand, EFV's largest geographical allocations are Japan at 22.2%, the U.K. at 18.9%, German at 10.9%, France at 9.8% and Australia at 7.4% (Figure 5).

Finally, Figure 6 shows the sector allocation of the AIVI ETF. AIVI's AI model is currently heavily overweight Financials at 31.9%, Consumer Staples at 10.8%, Industrials at 10.6%, Real Estate at 8.2%, and Health Care at 7.9%.

Compared to the EFV ETF, the AIVI ETF has a notable overweight in Financials (31.9% vs. 27.2%), Consumer Staples (10.8% vs. 6.0%), and Real Estate (8.2% vs. 3.8%). The AIVI ETF is underweight Industrials (10.6% vs. 13.1%), Materials (7.5% vs. 9.5%) and Consumer Discretionary (4.4% vs. 8.3%) (Figure 7).

Returns

Figure 8 shows the historical returns of the AIVI ETF. Investors should note that since the strategy was changed in January 2022, only 2022 and YTD 2023 returns are representative of the AIVI's new AI model.

Figure 9 shows the EFV ETF's returns for comparison. Overall, the AIVI ETF performed worse than the EFV ETF in 2022, returning -10.0% vs. -5.4%. So far in 2023, AIVI has returned 13.1% outperforming EFV's 9.5% to April 30, 2022.

Figure 10 uses Portfolio Visualizer to compare between the AIVI ETF and the EFV ETF directly from January 2022 to April 2023. AIVI's large underperformance in 2022 have caused it to underperform overall, with a CAGR return of 1.6% vs. 2.8% for EFV. AIVI also has a higher volatility and worse risk ratios compared to EFV.

Distribution & Yield

The AIVI ETF pays an attractive trailing 12 month distribution of $1.74 / share or 4.4% yield. AIVI's distribution is paid quarterly.

Although AIVI has lower CAGR returns compared to the EFV ETF since the model change, it has paid a higher distribution yield, as the EFV ETF has only paid a trailing $1.91 / share or 3.9%.

Conclusion

The WisdomTree International Al Enhanced Value Fund ETF uses the sub-advisor's proprietary quantitative AI model to select international value stocks. Without much details on the strategies employed, we can only assess the fund based on its output, i.e. performance results.

Based on the 16 months of performance results since the strategy change, there does not appear to be any meaningful 'alpha' from AIVI's AI model. It has underperformed the passive iShares MSCI EAFE Value ETF since January 2022, with higher portfolio volatility.

While there is currently a lot of hype around AI at the moment, with over 1,000 companies mentioning it in their Q1/2023 earnings calls, judging by AIVI's underperformance relative to the EFV ETF, human investors can probably sleep well for another few years. I recommend investors stay on the sidelines for now on the AIVI ETF.

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