Introducing the WideAlpha AI-Selected Index
Why and how did we create this index and what are our expectations for it.
In 2019 we launched the WideAlpha AI-Selected index, which is composed of companies with good ESG ratings and selected by an AI algorithm trained to classify companies on whether they are likely to outperform the market in the next 3-5 years. It then performs Monte Carlo simulations to find the optimal allocation to each of the companies it had previously selected. Using back-testing we found that on average we could generate ~7% out-performance vs. the market, but wanted to confirm this with a live-test. This live test is this index, which has roughly performed according to our expectations, even though its benchmark managed to catch up with it in 2021, but it has since dramatically outperformed again.
We are using the Russell 1000 Growth as benchmark, given its higher concentration of technology and fast growth companies. We consider this benchmark appropriate given that we think it will be more difficult to outperform, and given the fact that its sector composition is closer to that of the high-ESG universe among which the AI is allowed to select positions for the index.
The number of companies that make up the index varies with time, the AI algorithm can decide to add new ones or remove existing ones. It currently has 17 positions, including some bond ETFs, but has a high concentration in its top 5 positions at the moment. These include companies HP Inc, Bank of New York Mellon, Workiva, Taiwan Semiconductor, and ASML. We plan on sharing the complete composition of the index, as well as timely updates on rebalances and index changes to our paid subscriptions. These paid subscriptions are needed to help us finance the development of the algorithms and access to fundamental market data that is needed to feed the algorithms. We plan on offering the subscription at a low enough price to let any investor interested in following the index to be able to do so.
That’s it for this introductory post. We plan to do in-depth analysis of some of the constituents of the index, and keep you update on changes. If readers are interested we can also share a bit more about the technology behind the algorithms. Stay tuned!
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