October 2021 Qraft ETFs Rebalancing Key Takeaways

October 13, 2021 EDT

About Qraft Technologies

Founded in 2016, Qraft Technologies is on a mission to innovate the asset management process. From AI-powered ETFs to AI Order Execution, we seek to leverage AI to expand the capability of finding alpha without exponentially increasing the cost to achieve this goal. 

The name Qraft is a portmanteau of the words ‘Quant’ and ‘Craft’, conveying the purpose of the company in crafting quantitative solutions for clients using our propitiatory AI technology. Qraft’s in-house, vertically integrated, AI suite offers it the ability to be nimble and always adapt to the changing needs and condition of the market. Qraft aims to continue to develop and provide a full comprehensive suite of AI-powered enabling services for financial firms, from building portfolio (Asset Allocation Engine), data handling (Kirin API), identification of alpha (Alpha Factory), to order execution (AXE). Our goal is to use technology to increase the accessibility of financial products for people everywhere.  

October Key Takeaways

While economic growth continues in the US, the pace of recovery seems to be much slower than what was optimistically predicted in the past. The Delta-variant has played a part in adding to uncertainty, even while its infection peak has passed. China has been experiencing a series of slowdowns, which many investors worry may impact US markets[1].

US consumer sentiment has turned and is currently at the lowest point year to date. Consumers have been impacted by the end of the federal eviction moratorium as definitively decided in the Supreme Court in September[2], with many now facing months of unpaid rent due. It is estimated that there are over 6 million renters who owe a cumulative $41 billion in rent[3]. Federal unemployment benefits have also ended for millions of people, and many economists are worried that the rapid downward trend in unemployment figures actually indicates that many of those who have benefited from unemployment have decided to stay out of the labor markets[4] altogether. Labor shortages persist in key industries such as shipping and logistics, creating supply bottlenecks for many companies. This is coupled with the highest gas prices since 2014, further driving up operating costs.

With the Fed announcing that unemployment is the last hurdle to be cleared before it starts tapering asset purchases, October will be a crucial month in deciding when this taper starts[5].

Key Takeaways NVQ

Decrease in consumer discretionary sector

  • NVQ consumer discretionary holdings decrease from 23.35 to 8.18%
  • While economic growth continues, it is seen as slower than expected and consumer confidence index & sentiment indices are at this year’s low[6]
  • Consumer discretionary may also have been impacted greatly by cuts in COVID era benefits to millions of Americans

Big bet on big energy?

  • Energy sector comprises 24% of all holdings, up from 1.72% in September, representing a near 14-fold increase with the addition of Exxon, Chevron, and Conoco Phillips
  • Gas prices are highest in many places in the developed world since 2014[7]
  • Natural gas prices are up more than 150% in the last year
  • Exxon Mobil, top NVQ holding, starts JV with SABIC[8], Chevron acquires Neste base oils business[9], and ConocoPhillips acquires Shell Permian Basin for $9.5 billion[10]

Intel remains top pick for three months & continuing supply issues for semiconductors

  • Intel continues its rebuilding process as CEO announces that “Intel is back” with announcement of new generation chips
  • Breaks ground on $20 billion facility in Arizona[11] and announced plans of investing $80 billion on European facilities aimed to target the automobile sector[12]
  • Supply & demand issues that started at the beginning of the pandemic has not abated
  • Intel will continue to benefit from built-up demand on a multi-year basis

Semiconductor shortage hurts automakers -Ford removed from holdings

  • Ford is one of the top stocks out of the portfolio as it struggles to overcome the semiconductor supply issues faced by most automakers
  • It is estimated that supply shortages will now cost the automotive industry $60 billion as opposed to $210 billion predicted earlier this year[13]

Key Takeaways AMOM

Facebook woes continue with Instagram whistleblower

  • Facebook removed from holding as it faces idiosyncratic risk from whistleblower exposing Facebook’s prior knowledge of Instagram’s harmful effects on teenagers[14]
  • Much publicized WSJ expose on this issue increases scrutiny on an already embattled company due to privacy and neutrality issues leading to new product delays

Construction market turns around

  • Lowe’s and Home Depot are in the top three holdings this month
  • Holdings in Home Depot has increased more than 45%, month to month
  • Housing permits have increased for two straight months[15], which is seen as indication that problems earlier in the year with construction supplies are fading
  • Labor shortages are expected to improve in the future as benefits are being cut, providing much needed labor to the construction industry

Are some retail businesses better positioned to ride out supply issues?

  • Amazon continues to be the top holding and Target has also been added to holdings
  • Amazon has been able to solve labor issues by offering incentives to employees
  • Continues to boast a strong supply chain system, with one of the largest air cargo fleets in the world
  • Target increases employee incentives to capture holiday revenue and have ordered inventory having foreseen supply issues

AMOM on course to predict profit-taking trade for DocuSign again?

  • AMOM has been able to carry out profit-taking trades in DocuSign in the past year

Key Takeaways HDIV

HDIV adds energy stocks to pursue high yield and growth strategy

  • Exxon & ConocoPhillips are some of the top names added, with both firms offering consistent dividend yields[16]
  • Both firms have announced major deals with ConocoPhillips acquiring Shell’s Permian Basin for $9.5 billion[17]
  • Energy sector is expected to continue to benefit from rising gas prices and supply issues

Firms offering consumer staples and high dividend yields round out top holdings

  • Positioned to protect against uncertain markets with staple names such as Verizon, P&G, and Pepsi

Home Depot expected to benefit from increase in construction activity

  • Construction activity has rebounded for the past few months
  • Sales of newly constructed homes have rebounded to pre-pandemic levels[18]

Merck sees success in COVID treatment molnupiravir

  • Molnupiravir has been used a COVID treatment in clinical trials and is expected to receive emergency use authorization from the FDA[19]
  • Share prices spiked 8.4% on October 1st alone

AbbVie finalizes agreement to partake in age-related vision degeneration treatment

  • $370 million agreement for the rights of RGX-314, a promising treatment against age related vision degeneration, a common disease estimated to affect nearly 200 million[20]
  • AbbVie has seen increases in dividends for 20 consecutive years[21]

Texas Instruments increase dividend

  • Increased in dividend to 13%, more than half of its free cash flow this year[22]

Key Takeaways QRFT

QRFT decrease tilt in quality factor

  • Decrease in quality factor 4.49 percentage points

QRFT increases momentum and size factor tilts

  • Increase in momentum and size factors by 3.18 and 1.04 percentage points respectively

Portfolio holdings should not be considered investment advice.

 

[1] Wolf, Martin. “The Economic Threats from China's Real Estate Bubble.” Financial Times, Financial Times, 5 Oct. 2021, https://www.ft.com/content/1abd9d4b-8d94-4797-bdd7-bee0f960746a. 

[2] Liptak, Adam, and Glenn Thrush. “Supreme Court Ends Biden's Eviction Moratorium.” The New York Times, The New York Times, 27 Aug. 2021, https://www.nytimes.com/2021/08/26/us/eviction-moratorium-ends.html.

[3] Cembalest, Michael. “Dude, Where's My Stuff?: J.P. Morgan Private Bank.” Private Banking & Wealth Management, 27 Sept. 2021, link

[4] Morath, Eric. “Falling Unemployment Could Add to Worries about the U.S. Labor Market.” The Wall Street Journal, Dow Jones & Company, 3 Oct. 2021, https://www.wsj.com/articles/falling-unemployment-could-add-to-worries-about-the-u-s-labor-market-11633269601.

[5] Timiraos, Nick. “Fed Tees up Taper and Signals Rate Rises Possible next Year.” The Wall Street Journal, Dow Jones & Company, 22 Sept. 2021, https://www.wsj.com/articles/fed-tees-up-taper-and-signals-rate-rises-possible-next-year-11632333617.  

[6] “Surveys of Consumers.” Surveys of Consumers, University of Michigan, http://www.sca.isr.umich.edu/.  

[7] Krauss, Clifford, and Peter Eavis. “Energy Prices Spike as Producers Worry over Pandemic and Climate.” The New York Times, The New York Times, 4 Oct. 2021, https://www.nytimes.com/2021/10/04/business/energy-environment/oil-and-gas-prices-clean-energy.html. 

[8] “Sabic, ExxonMobil JV in U.S. Preparing for Initial Startup.” Reuters, Thomson Reuters, 19 Sept. 2021, https://www.reuters.com/business/energy/sabic-exxonmobil-jv-us-preparing-initial-startup-2021-09-19/. 

[9] “Neste Sells Base Oils Business to Chevron.” Reuters, Thomson Reuters, 4 Oct. 2021, https://www.reuters.com/business/energy/neste-sells-base-oils-business-chevron-2021-10-04/. 

[10] Jessica Resnick-ault David French. “Shell Exits Permian with $9.5 Bln Texas Shale Sale to ConocoPhillips.” Reuters, Thomson Reuters, 21 Sept. 2021, https://www.reuters.com/business/shell-nears-deal-sell-texas-shale-assets-conocophillips-95-bln-wsj-2021-09-20/. 

[11] Stephen Nellis. “Intel Breaks Ground on $20 Bln Arizona Plants as U.S. Chip Factory Race Heats Up.” Reuters, Thomson Reuters, 25 Sept. 2021, https://www.reuters.com/technology/intel-breaks-ground-20-bln-arizona-plants-us-chip-factory-race-heats-up-2021-09-24/. 

[12] Victoria Waldersee Stephen Nellis. “Intel to Invest up to 80 Bln Euros in Boosting EU Chip Capacity-CEO.” Reuters, Thomson Reuters, 7 Sept. 2021, https://www.reuters.com/business/autos-transportation/intel-says-it-will-reserve-ireland-chip-factory-capacity-automakers-2021-09-07/. 

[13] Cembalest, Michael. “Dude, Where's My Stuff?: J.P. Morgan Private Bank.” Private Banking & Wealth Management, 27 Sept. 2021, https://privatebank.jpmorgan.com/gl/en/insights/investing/eotm/dude-where-is-my-stuff. 

[14] Wells, Georgia, et al. “Facebook Knows Instagram Is Toxic for Teen Girls, Company Documents Show.” The Wall Street Journal, Dow Jones & Company, 14 Sept. 2021, https://www.wsj.com/articles/facebook-knows-instagram-is-toxic-for-teen-girls-company-documents-show-11631620739?mod=article_inline.   

[15] Cambon, Sarah Chaney. “U.S. Economy Is Expected to Pick up Speed after Delta-Driven Downturn.” The Wall Street Journal, Dow Jones & Company, 29 Sept. 2021, https://www.wsj.com/articles/u-s-economy-set-to-pick-up-speed-after-delta-driven-downturn-11632907800. 

[16] Scheepers, Ferdi. “7 Best Energy Sector Dividend Stocks.” Dividend Strategists, Dividend Strategists, 12 July 2021, https://www.thestreet.com/dividendstrategists/dividend-ideas/7-best-energy-sector-dividend-stocks. 

[17] Jessica Resnick-ault David French. “Shell Exits Permian with $9.5 Bln Texas Shale Sale to ConocoPhillips.” Reuters, Thomson Reuters, 21 Sept. 2021, https://www.reuters.com/business/shell-nears-deal-sell-texas-shale-assets-conocophillips-95-bln-wsj-2021-09-20/. 

[18] Redfin. “Sales of New-Construction Homes Rebound to Pre-Coronavirus Levels, Rising 10% in July.” Sales of New-Construction Homes Rebound to Pre-Coronavirus Levels, Rising 10% in July, 25 Aug. 2020, https://www.prnewswire.com/news-releases/sales-of-new-construction-homes-rebound-to-pre-coronavirus-levels-rising-10-in-july-301117619.html.  

[19] Hopkins, Jared S., and Betsy McKay. “Merck Pill Intended to Treat Covid-19 Succeeds in Key Study.” The Wall Street Journal, Dow Jones & Company, 1 Oct. 2021, https://www.wsj.com/articles/pill-intended-to-be-covid-19s-tamiflu-succeeds-in-key-study-11633082401. 

[20] Bell, Jacob. “AbbVie Bets Big on a Gene Therapy for Eye Diseases.” BioPharma Dive, 13 Sept. 2021, https://www.biopharmadive.com/news/abbvie-regenexbio-eye-gene-therapy-deal/606473/. 

[21] Withers, Rachel Warren and Brian. “Here's Why AbbVie Is a Great Healthcare Stock for Long-Term Investors.” The Motley Fool, The Motley Fool, 29 Sept. 2021, https://www.fool.com/investing/2021/09/29/why-abbvie-is-great-stock-for-long-term-investors/. 

[22] Witkowski, Wallace. “Texas Instruments Hikes Dividend 13%, More than Half of Free Cashflow Paid to Stockholders.” MarketWatch, MarketWatch, 15 Sept. 2021, https://www.marketwatch.com/story/texas-instruments-hikes-dividend-13-more-than-half-of-free-cashflow-paid-to-stockholders-11631739226. 

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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.