The sales pitch for AI-powered ETFs was that algorithms could not only pick stocks more efficiently and logically than humans, but also less expensively. So far, most haven’t lived up to investors’ expectations.

AI-driven strategies use algorithms to research and gather data on stocks and investments to select a fund’s underlying holdings. Developers of such ETFs were betting that AI could build a valuable niche by processing information faster than any human analyst, spotting trends before the rest of Wall Street. Instead, they’ve underperformed or closed altogether, said Bryan Armour, Morningstar director of ETF and passive strategies.

“They are trying to make it work,” Armour said. “There have been a few attempts, but so far, it hasn’t been very successful.”

Closing Time

Of the 12 AI-powered ETFs that Morningstar began tracking around 2020, seven have closed due to low assets under management, according to Armour. A key reason is that the mistakes often made by active managers or new investors, such as overtrading, were also being made by the AI models. The ones left standing have high fees — the Qraft AI-Enhanced US Large Cap Momentum ETF (AMOM), for example, has an expense ratio of 0.75% — preventing them from taking off, Armour added. “Of the ones that are still alive… all are pretty expensive,” he said. “You would think with AI picking it, it would be a cheaper substitute for an active manager. That hasn’t been the case.”

Other closed AI-driven ETFs include:

• The BTD Capital Fund (DIP), which used AI to invest in US equities and closed last year.
• The Optimize AI Smart Sentiment Event-Driven ETF (OAIE), which used AI to monitor option activity, closed in early 2024 after less than two years on the market.

Feel the BUZZ

One exception is VanEck’s Social Sentiment ETF (BUZZ), which has climbed 45% so far this year. The fund uses AI to sift through millions of blog posts, news articles and forum comments, measuring whether feelings about a stock are positive or negative. From there, a rules-based system selects the 75 most bullish large-cap names, capping each at a 3% weight and rebalancing monthly. Armour said BUZZ arose out of the memestock craze of 2021, when investors were trying to pick the next GameStop.

“At a high level, we think of the index as a way to measure the investor sentiment of stocks as a factor,” said VanEck product manager Coulter Regal. “There’s all types of factors — momentum, value, growth. But one thing that wasn’t really out there, or at least wasn’t measurable until recently, was sentiment.”

Where To Go From Here? AI may be more useful as a tool to gauge investor sentiment rather than as a standalone strategy. And investors are unlikely to want to give up the decision-making know-how of a flesh-and-blood fund manager, Armour said. “At least for a while, people would probably prefer having a human making the end decisions,” he added.

The Trump administration reportedly plans to keep most national parks open during the government shutdown. That means Americans can still enjoy viewing the annual deciduous kaleidoscope of red, yellow, umber and orange in the autumn foliage of the country’s most storied wilderness preserves.

The view for economists, investors and Federal Reserve officials, on the other hand, will be at least partially obstructed amid a data blackout. Notably, that means the Bureau of Labor Statistics’ monthly jobs report is now unlikely to be published on Friday. That lent outsized weight on Wednesday to payroll provider ADP’s monthly private sector jobs report: It augurs well for a rate cut, though not so much for the labor market.

Data Backup

There are no immediate dramatic risks to equity markets from the shutdown, experts have said. “Back in the 70s/80s, shutdowns resulted in poor market reactions,” John Luke Tyner, Aptus Capital Advisors’ head of fixed income, noted on Wednesday. “However, since 1995, the S&P 500 has finished higher during every shutdown.” He added that, because this is a “partial shutdown” due to a failure to pass the budget, rather than a standoff over the debt ceiling, it is “less worrisome for markets given there is no default risk.” To that end, the S&P 500 rose 0.3% Wednesday.

What is at risk is data that investors and policymakers rely on to make decisions. According to ADP’s latest report, the labor market isn’t doing so hot. Private payroll employment fell by 32,000 in September, significantly below the consensus forecast of a 51,000 increase. In addition, ADP revised its previously reported gain of 54,000 in August to a drop of 3,000. Private payroll job growth has averaged just 23,000 in the past three months, and has fallen in three of the past four months, figures which could soon weigh extra heavily on the Fed:

• Bill Adams, Comerica Bank’s chief economist, said the “weaker than expected” ADP report “could have outsize influence on the next Fed decision” if the shutdown lasts until the central bank’s next policy meeting on October 29. The private payroll data “makes the Fed more likely to cut the federal funds target another quarter percent at their October meeting,” he added, noting Comerica forecasts 25 basis-point cuts in October and December.
• Another data point released Wednesday, the Institute for Supply Management’s latest Purchasing Managers’ Index, indicated new orders and employment in the manufacturing sector contracted last month. Input costs also rose as tariffs continued to ripple through the economy, or as one respondent to the survey bluntly put it: “Steel tariffs are killing us.”

Not to Blame: One factor that’s not yet to blame for labor market disruption is artificial intelligence. Despite fears, a new Yale Budget Lab analysis found that the US job market hasn’t experienced significant disruption due to advances in AI since the launch of ChatGPT in 2022.

Don’t think of it as selling out, but rather as buying in.

Over the next half of the decade, there are expected to be 1,500 M&A deals involving asset and wealth managers, according to a new report from consultancy Oliver Wyman and Morgan Stanley. That means one in five firms existing today will be acquired by 2029. In the past, the wealth and asset management industries were highly fragmented, and firms could find success with small teams and just a handful of clients. But the landscape is changing.

“In 2024, the industry saw record AUM transacted, bolstered by high-profile mergers and thriving mid-market consolidation activity,” analysts said in the report. “These dynamics are already at play.”

Dealer’s Choice

The issue is that mid-sized firms are being squeezed by shrinking profit margins and rising technology costs. Meanwhile, many new clients are going toward already large, profitable firms that have the funds to improve their tech stacks and hire new talent. Clients are consolidating, too, choosing firms that can do all their financial planning and portfolio management under one roof.

And deal numbers aren’t slowing down. In fact, they’re twice as high as they were a decade ago, the report found. Since 2022, more than 200 deals a year has become the new normal:

• By the end of this year, analysts project a total of 266 transactions. By 2029, that number could be closer to 350.
• Most deals today are within the same sector — asset managers acquiring asset managers, and wealth managers acquiring wealth managers — the report found.

Raw Deal. While consolidation has led to greater valuations for wealth managers, deals aren’t always a success. Less than 40% of asset managers transactions improved cost-income ratio three years after the deal, and many saw clients pulling money out or growth lagging behind the market, the report found.