Money managers have used AI-like tools for some time,but the rise of robo-advisers is what caught the attention ofindexers and ETF issuers.

(Bloomberg) –Kensho Technologies was focused on analyzing NorthKorean missile launches, earthquakes and electionswhen John van Moyland joined in 2014. The CIA wasamong its early backers.

Now, its focus has shifted to finance.

S&P Global Inc. bought the firm last year and theartificial-intelligence startup lasered in onanother technical challenge: developing the next generation ofindexed funds.

According to van Moyland, machines are ready to design better indexes tounderpin investment vehicles passively managing $7.3 trillion inthe U.S.

“We're doing what a lot of research shops have done with humansin the past — and doing it at scale, in a highly predictable,highly automated, efficient way,” van Moyland, managing directorand global head of S&P Kensho Indices, said in an interview.“Why would you ever limit yourself to aged financial data whenthere's a sea of information out there?”

The race is on to create robotic ETFs — a bet that humaninvestors would rather trust investment vehicles designed withfar-flung data digested with natural-language processing, machinelearning and AI.

Goldman Sachs Group Inc. — which along with Google Ventures alsobacked Kensho in its early years — launched a series ofexchange-traded funds that track indexes designedby machines. BlackRock Inc. also offers some bot-builtproducts.

With more than 2,000 ETFs in the U.S. alone, managers mustbattle to stand out from the crowd. More urgently, fund issuers andindexers need specialized products that can yield higher fees aspassive investing takes a bite out of revenue. While abroad-market stock ETF generates fees of as little as 20 cents forevery $1,000 invested, AI-designed ETFs range from $1.80 to $8.

Kensho's machines are helping S&P develop indexes withadvanced methods that identify relevant stocks. The bots captureall the ways an industry is described — searching for references toself-driving cars as well as automated vehicles, for example —while adding related industries such as lithium batteries in thisinstance. Among its creations is the Final Frontiers Index ofcompanies involved in exploration of deep space and theocean depths.

Once programmers have a universe of securities, they usenatural-language processing to understand context, confirming thatreferences are to new products or services rather than risks, forexample. That lets them weight the index accordingly.

But as the buzz grows, it risks becoming more marketing thansubstance. Van Moyland warned that the bots require “expertise anddiscipline if you're going to produce a quality product.”And Peter Zangari, MSCI's global head of research andproduct development, said there's no substitute for humananalysis.

“None of this stuff is, you hand it over to a machine and you'redone with it,” Zangari said. “But increasingly you will see thismachine learning, AI, whatever we call it, play an increasinglyimportant role in the investment process.

Robots are the ideal data miners — thorough, persistent, andcapable of processing huge quantities of information in the blinkof an eye. At least 20 funds now explicitly claim to use artificialintelligence as a building block, to the chagrin of some earlyproponents who fear its meaning is being watered down.

Already one AI-driven ETF has shuttered after failing to attractassets.

“A lot of times, institutions are saying that they're using AIand really all they've done is automate some process,” said ArtAmador, co-founder of EquBot, which  runs twoETFs that use IBM's Watson platform. “It takes away from everythingwe're doing.”

Hedge funds and money managers have used AI-like toolsfor some time, but the rise of robo-advisers is whatcaught the attention of indexers and ETF issuers. From the get-go,robos like Betterment LLC and Wealthfront Inc. used technology toundercut more-established rivals. Firms are following their lead tounleash a new wave of ETFs on the market.

BlackRock, the world's largest asset manager, offers AI-poweredfunds known as “ iShares Evolved.” State Street Corp.'s ETFs —which use Kensho's “New Economies” indexes — and Goldman Sachs'sMotif-branded funds also owe a debt to machines. And EquBot'sAmador said his company aims to be the “Google of finance,” and isworking with asset managers to build two indexes for release thisyear.

“It's an extraordinary and exciting time,” said JeffShen, co-chief investment officer of active equity and co-head ofsystematic active equity at BlackRock. “Nobody really hascompletely figured it out yet,” he said. “The time is now.”

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