Qraft AI-Enhanced U.S. Large Cap Next Value ETF - Investment Case

April 16, 2021 EDT

Qraft AI-Enhanced U.S. Large Cap Next Value ETF is an actively managed portfolio of U.S. large cap value stocks, handpicked directly by AI technology.

If you know Warren Buffett, he is a huge advocate of value investing. But in recent years, value stocks have fallen deeply out of favor by many investors as growth stocks continue to dominate the market with wide margins.

A careful examination of value and growth stocks over the last 13 years (January 2007-June 2020) shows that value has underperformed growth by at least 39%, according to data from Research Affiliate, a global leader in factor investing and asset allocation.

But while no one knows what the future holds in the stock market, many investors believe that value will soon take over growth once again. In fact, we here at Qraft Technologies, Inc., believe there is one major factor that, once changed, could potentially uplift the value factor once and for all.

What Is Value?

The basic concept of value investing is to buy stocks that fall below their intrinsic value.

In other words, value investors actively pick stocks that are deemed cheap compared to their valuations. For example, stocks go through periods of higher or lower demands that lead to price fluctuations. This does not change the fact that those stocks’ value will decline. And in return for buying and holding these type of stocks, investors can be rewarded handsomely, as such was the case with Warren Buffett.

Poised For a Comeback

The reason value investing has been subpar in its performance is because we believe our current approach to calculating the value factor has been wrong for a while. In today’s financial markets, intangible assets are often overlooked but they play an integral role in book value calculations.

With regards to the value factor, if you are not measuring the assets properly, you may not correctly determine that a company is undervalued or overvalued. For example, you shouldn’t just rely on tangible assets like factors or lands when companies like Amazon or Apple spends considerable amount of expenses on intangible assets like trademarks, patents, and branding.

Intangible Assets

Intangible assets have no physical presence, but they add long-term value to all businesses. You can divide the assets into two broad categories: intellectual properly and goodwill. Intellectual properly refers to any possession or product that is owned and created by the human mind. This may include trademarks, patents, or licensing agreements. Goodwill, on the other hand, refers to a company’s brand value. This includes employee relations, loyal customer base, brand identity, and proprietary technology.

Intangibles used to play a very minor role, with physical assets comprising the majority of value for most enterprise companies. However, as the economy tilts its value from factories, office buildings, and machineries to ideas, brands, and software, the need to shift from tangible capitals to intangibles will become more apparent than ever before.

One issue is that measuring intangibles through the conventional accounting methods is extremely challenging. While some companies voluntarily share this information in their reports to give investors a better idea of their value, those numbers are mostly developed in-house and subject to pre-determined prices. In essence, intangibles have unclear boundaries and calculating a meaningful analysis can be an almost impossible task.

The Predictive Power of AI

Qraft’s AI technology aims to learn relevant data to the future intangible assets (R&D costs, marketing costs, patent issuance, etc.) and properly measure a company’s book value. Then our AI will invest in stocks that have a higher ratio of adjusted book value to their market value.

This AI technology is applied to our AI ETF called the Qraft AI-Enhanced U.S. Next Value ETF (NYSE: NVQ). NVQ invests in U.S. large cap stocks by allowing AI to measure intangible assets to correct the traditional value metrics. The investment objective of the fund is to seek capital appreciation.

NVQ Performance

Since its inception on 12/02/20 on the New York Stock Exchange until 3/31/21, NVQ has outperformed its benchmark S&P 500 Index and brought a total return of 23.60%.

*As of date: 3/31/2021 (Q1)
*NAV: Net asset value is calculated as the total value of the entity’s assets minus the total value of its liabilities.
*Market Price: The market price can change quickly as people change their bid or offer prices, or as sellers hit the bid or buyers hit the offer.

The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost. Returns less than one year are not annualized. Performance data current to the most recent month end may be obtained by visiting qraftaietf.com.

As of 3/31/21, QRFT has 100 holdings with over 225,000 outstanding shares and an expense ratio of 0.75%. Current AUM is $3.8M and the average daily volume traded amounts to $26.75K. Factors are dynamically adjusted on a monthly basis according to macroeconomic changes and the stocks that best represent the characteristics of each factor are selected for investing. Current top holdings include companies such as Intel, Bristol-Myers Squibb, Raytheon Technologies, Micron Technology, and Gilead Sciences.

Aside from positive returns, what’s more important about NVQ is that at its core, the AI technology handles all the backend work to find high return factors quickly and at low cost. In other words, Qraft Technologies has developed a strategy that streamlines data processing and research to find optimal ways to potentially outperform benchmark indices.

Qraft’s AI Technology

Qraft’s AI technology can be broken down into three parts: data processing, strategy extraction, and execution system.

  1. Data Processing: Through parallel computations accelerated by GPU (graphics processing unit), Qraft Technologies has created a system that automates the long and arduous tasks to pre-process raw financial data from vendors like S&P Global and Refinitiv (formerly known as Thomson Reuters). This streamlines the elimination of survivorship bias, look-ahead bias, and accurate processing of corporate events.
     
  2. Strategy Extraction: After data processing comes the research. With a vast array of search universe available, a well-engineered deep learning model could narrow the probable candidates through back/forward testing and automatically extract an investment strategy that works. This automatic extraction process is composed of two modules: factor factory and strategy factory.
     
  • Factor Factory: Using automated machine learning technology, Factor Factory automatically searches for patterns that have the potential to bring excess returns. It’s able to produce more than 10 patterns per day without any human intervention.
     
  • Strategy Factory: With the factors found through Factor Factory, Strategy Factory extracts an investment strategy through a non-linear asset pricing model. The more factors gathered from Factor Factory, the more sophisticated asset pricing models that Strategy Factor can generate.
     
  1. AI Execution System (AXE): Qraft Technologies has developed a system that applies reinforcement learning technology in efforts to significantly increase the performance of order executions. AXE explores the optimal order execution strategy by learning patterns from tick data, which includes the price and transaction volume as well as its history. With AXE, it’s possible to improve the return of active index funds by minimizing the transaction cost of all financial products.

 

 

For more information about Qraft’s AI technology, please send inquiries at qraftaietf@qraftec.com.

 

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 1-855-973-7880 or visit our website at www.qraftaietf.com. Read the prospectus or summary prospectus carefully before investing.

The Funds are distributed by Foreside Fund Services, LLC

Investing involves risk, including loss of principal. The Funds are subject to numerous risks including but not limited to: Equity Risk, Sector Risk, Large Cap Risk, Management Risk, and Trading Risk. The Funds rely heavily on a proprietary artificial intelligence selection model as well as data and information supplied by third parties that are utilized by such model. To the extent the model does not perform as designed or as intended, the Fund’s strategy may not be successfully implemented and the Funds may lose value. Additionally, the funds are non-diversified, which means that they may invest more of their assets in the securities of a single issuer or a smaller number of issuers than if they were a diversified fund. As a result, each Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. A new or smaller fund's performance may not represent how the fund is expected to or may perform in the long term if and when it becomes larger and has fully implemented its investment strategies. Read the prospectus for additional details regarding risks.


QRAFT AI-Enhanced U.S. Large Cap ETF: Companies in the health care sector are subject to extensive government regulation and their profitability can be significantly affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines and an increased emphasis on the delivery of health care through outpatient services.

QRAFT AI-Enhanced U.S. Large Cap Momentum ETF: The Fund is subject to the risk that market or economic factors impacting technology companies and companies that rely heavily on technology advances could have a major effect on the value of the Fund’s investments. The value of stocks of technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, the loss of patent, copyright and trademark protections, government regulation and competition, both domestically and internationally, including competition from foreign competitors with lower production costs. Technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market.

QRAFT AI-Enhanced US High Dividend ETF: Securities that pay dividends, as a group, may be out of favor with the market and underperform the overall equity market or stocks of companies that do not pay dividends. In addition, changes in the dividend policies of the companies held by the Fund or the capital resources available for such company’s dividend payments may adversely affect the Fund. In the event a company reduces or eliminates its dividend, the Fund may not only lose the dividend payout but the stock price of the company may also fall.

QRAFT AI-Enhanced U.S. Next Value ETF: The value approach to investing involves the risk that stocks may remain undervalued, undervaluation may become more severe, or perceived undervaluation may actually represent intrinsic value. Value stocks may underperform the overall equity market while the market concentrates on growth stocks. The small- and mid-capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic evens than larger, more established companies, and may underperform other segments of the market or the equity market as a whole. Securities of small- and mid-capitalization companies generally trade in lower volumes, are often more vulnerable to market volatility, and are subject to greater and more unpredictable price changes than larger capitalization stocks or the stock market as a whole.

Alpha – Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.

AutoML – Short for Automated Machine Learning, AutoML is the automation of the machine learning process to make machine learning jobs simpler, easier, and faster.

Kirin API - Developed by Qraft’s data scientists, integrates multiple vendors to provide both macroeconomic and company fundamentals with the correct point-in-time data.