Active ETFs — A Force To Be Reckoned With
The growing popularity of actively managed ETFs
In the years past, mutual funds have been the dominant driver in the U.S. equity market. With over $18 trillion in total assets in 2020, mutual funds remain a monolithic presence. Meanwhile, exchange-traded funds have surged in popularity among institutional and retail investors. In 2020 alone, investors put together a net of $505 billion into ETFs, according to State Street Global Advisors in their article called How Investors Turned to ETFs for Liquidity and Market Access in 2020. It is likely that this shift will affect the greater equity markets in the long-term.
ETFs, like other investment funds, include both traditional index funds as well as actively managed funds. One big difference between ETFs and mutual funds is how they are traded. For instance, ETFs can be traded like regular stocks — meaning they can be bought or sold at any time within market hours. On the other hand, mutual funds can only be purchased at the end of each trading day based on a calculated price.
For decades, Vanguard and Blackrock, both ETF powerhouses, have led the way in popularizing ETF products. Up until recently, most, if not all, ETFs have been passively managed. This means that ETF products usually track a major equity or bond index. The goal for passive investments is simple — to replicate the performance of a specific index. The benefits of indexing include diversification and lower expense fees. In essence, passively managed funds provide investors with long-term opportunity to grow their wealth.
Source: Bartolini, Matthew J., and Colin J. Ireland. How Investors Turned to ETFs for Liquidity and Market Access in 2020, 3 Feb. 2021, www.ssga.com/us/en/institutional/etfs/insights/how-investors-turned-to-etfs-for-liquidity-and-market-access-in-2020.
Passive Investing in ETFs
Passive ETFs first came to the market in 1993 when State Street launched the SPDR S&P 500 ETF (NYSE:SPY) in the U.S. The fund tracks the Standard & Poor’s 500 Index, which makes up 500 of large and mid-cap U.S. publicly listed companies. As a passively managed fund, SPY offers investors the exposure to the greater U.S. equity market without having to invest in individual stocks.
One attractive component of passive ETFs is the buy-and-hold strategy that allows investors to take a hands-off approach. The reason for this is that many advocates believe outperforming the market is nearly an impossible task. Hence, they aim to match its entire performance rather than beat it. Having a hands-off approach also means providers can charge less fees.
Since the introduction of SPY, ETFs have grown into over $7 trillion in assets by the end of August 2020, according to ETFGI on 09/09/20, a leading independent research firm covering trends in ETFs and ETPs. While passive funds make up most of the assets, about 2% of the funds are actively managed, according to Forbes article released on 12/16/20 titled What Are Actively Managed ETFs? This new trend of active management is quickly gaining traction and shaking up the entire ETF industry.
Source: Marquit, Miranda. What Are Actively Managed ETFs?, Forbes, 16 Dec. 2020, www.forbes.com/advisor/investing/actively-managed-etfs/#:~:text=Most%20exchange%2Dtraded%20funds%20(ETFs,ETF%20industry%20are%20actively%20managed.
Movement Towards Actively Managed ETFs
Actively managed ETFs contain all the crucial components of passively managed ETFs as well as the potential benefits of investing in mutual funds. In other words, ETFs that are actively managed allow fund managers to track a popular index but also pick stocks and make frequent trades to generate potential returns. In most cases, active ETFs contain hundreds of securities, which allow investors to diversify their portfolios.
The general purpose of active management is to outperform the market. That is essentially the core mark up of any actively managed funds. However, one of the reasons why active ETFs have not gained enough traction until recently is because of the requirement by the Securities and Exchange Commission (SEC) to allow active managers to reveal all of their holdings each day. For passive management, this wasn’t a serious issue. But if you are a fund manager, you don’t want to disclose the holdings because essentially, that’s giving away your “secret weapon.”
More recently, the SEC has given a final approval to the non-transparent ETF structure. This allows fund managers to release only a portion of their holdings to the general public in different time periods. The decision by SEC has allowed ETF fund managers to essentially protect their own research and strategy.
While the number of actively managed funds is likely to increase in the coming years, there is much work that needs to be done in order to convince investors to buy active ETFs. For example, there is the issue of working with market makers. Market makers prefer full transparency in order to help ETFs trade efficiently. The role of a market maker is to maintain the functionality of the market by providing liquidity to buy and sell securities. Essentially, every ETF providers should work with market makers to ensure their products are traded smoothly.
Potential Advantages of Investing in Active ETFs
While there is no clear-cut answer to a perfect portfolio, ETFs in general may offer distinct advantages that make them better alternatives to traditional mutual funds. ETFs can provide lower fees, better tax efficiency, flexible trading, and greater transparency. With regards to investing in active ETFs, perhaps the biggest advantage is the potential to outperform the market index. Most actively managed funds have historically underperformed the market, according to a CNBC published piece on active management in 2019, titled Active fund managers trail the S&P 500 for the ninth year in a row in triumph for indexing. While this is true, there is also the fact that most active ETFs haven’t been in the market for many years. Additionally, the growth of newly launched actively managed ETFs are growing at unprecedented rate — actively managed ETFs and ETPs grew assets by 8% in July 2019 to $194 billion, according to Kiplinger’s 7 Actively Managed ETFs to Buy for an Edge. Meaning there may still be a chance that new active funds can potentially outperform passive funds in the years to come.
Take for example Cathie Wood’s Ark Innovation ETF (NYSE: ARKK). Since inception, this actively managed fund has surpassed all expectations and provided stellar performances in the market. As opposed to merely following a benchmark index, actively managed ETFs, like ARKK, directly manage weightings of each stock in a portfolio depending on a company’s valuations, greater industry trends, and views on macroeconomics. ARKK is just one example. But ever since actively managed ETFs were first introduced in 2008 by Bear Stearns Current Yield ETF, hundreds of new active ETFs have come to the market.
Qraft AI ETFs (NYSE: QRFT, AMOM, HDIV, NVQ) are actively managed ETFs. But what’s distinct about Qraft AI ETFs is that there is no human intervention involved in managing our ETFs. Our proprietary artificial intelligence technology plays the role of alpha researchers, portfolio managers, and traders. We also utilize our own API integration to provide both macroeconomic and company fundamentals with the correct point-in-time data.
Source: Pisani, Bob. Active Fund Managers Trail the S&P 500 for the Ninth Year in a Row in Triumph for Indexing. CNBC, 15 Mar. 2019, www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html.
Source: Ashworth, Will. 7 Actively Managed ETFs to Buy for an Edge., Kiplinger, 2 Sept. 2020, www.kiplinger.com/investing/etfs/601332/7-actively-managed-etfs-to-buy-edge.
The Role of AI in Active Management
As for Qraft Technologies, Inc., our AI enhanced ETFs provide full transparency in the confidence that our AI system directly manages and handpicks stocks each month when the portfolios rebalance. We are essentially trying to solve a long standing issue that has been at the forefront of active management industry by combining a low-cost/high-returns approach.
Qraft’s AI system has the capacity to fully automate investment management systems from start to finish. A traditional asset management process involves extensive human capital as well as costly fee structure. From hiring data engineers, alpha researchers, portfolio managers, and traders, a typical model will require a substantial amount of time and resources. With AI, however, this process can be streamlined and will require less work in efforts to produce equal amount or even better results.
Retail and institutional investors can directly invest in Qraft AI ETFs through their own brokerage accounts, including Fidelity, Charles Schwab, TD Ameritrade, E-Trade, and Robinhood. Please note that you cannot invest in our ETFs directly through Qraft Technologies, Inc.
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Investing involves risk including possible loss of principal. Diversification does not ensure profits or prevent losses.
Artificial intelligence selection models are reliant upon data and information supplied by third parties that are utilized by such models. To the extent the models do not perform as designed or as intended, the strategy may not be successfully implemented. If the model or data are incorrect or incomplete, any decisions made in reliance thereon may lead to the inclusion or exclusion of securities that would have been excluded or included had the model or data been correct and complete. Service providers may experience disruptions that arise from human error, processing and communications error, counterparty or third-party errors, technology or systems failures, any of which may have an adverse impact.
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 Qraft ETFs, please call (855) 973–7880 or visit our website at www.qraftaietf.com. Read the prospectus or summary prospectus carefully before investing.
Distributed by Foreside Fund Services, LLC
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.
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Market Makers is a firm or individual who actively quotes two-sided markets in a security, providing bids and offers along with the market size of each.
Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.
API is an acronym for Application Programming Interface, which is a software intermediary that allows two applications to talk to each other.
