Is AI-Based AMOM ETF a Good Investment or Just a Fad?

ETF investing is as popular as ever, and over the years, fund houses have offered differentiated products. In 2019, South-Korea-based fintech group Qraft introduced the AI-Enhanced U.S. Large Cap Momentum ETF (AMOM). Is AMOM a good investment for you?

AMOM, an actively managed fund, “leverages the latest AI technology to innovate the inefficiencies of today's asset management firms.” The ETF is benchmarked against the Invesco S&P 500 Momentum Index (SPMO).

Since AMOM was launched two years ago, it has underperformed the benchmark, SPMO, by almost four percentage points. However, 2021 has been a different ball game for AMOM, and it's outperforming SPMO by almost five percentage points.

AMOM, which substitutes human intelligence with AI, has 50 holdings and an expense ratio of 75 basis points. The expense ratio is in line with what Cathie Wood charges for her ARK ETFs, where she makes investment decisions, not AI. The funds benefited when Wood picked up Tesla and Square stock early. However, Wood's funds have been pressured recently amid a sell-off in growth names.

AMOM invests in large-cap U.S. stocks based on current market trends. In May, the ETF made several changes to its holdings, slashing its stake in Amazon, Tesla, and Facebook, and adding Snap, Walmart, and Qualcomm. The fund’s top five holdings are Walmart, Home Depot, Adobe, Texas Instruments, and Facebook, which remains its largest holding even after the May cut, at eight percent.

AMOM has a high churn rate and changes its holdings frequently. Its diversified portfolio includes social media, retail, tobacco, consumer goods, semiconductor, and tech companies.

It even holds GameStop, a meme stock that has gained infamy for trading way above what models tell us its valuation should be. The stock has been moving solely on sentiment and speculation.

While a “real” fund manager might not go near GameStop, AMOM has added it to its portfolio based on its AI-based model. Quant-based funds take a similar approach, investing based on quant models that are free of human intervention.

AMOM looks like a differentiated product, and considering that momentum has been driving stock prices, a “momentum-based” ETF looks well placed in today's volatile markets.

AMOM has outperformed the SPMO benchmark year-to-date. However, since its launch and over the last year, AMOM has underperformed the S&P 500. Therefore, while AMOM looks like a good bet, long-term investors may be even better served by ETFs based on the S&P 500. Even Berkshire Hathaway chairman and legendary value investor Warren Buffett advises investors to look at S&P 500 funds instead of actively managed funds.