A breath of fresh air in the value ETF space?

Value ETFs constitute some of the largest factor ETFs in the industry with an estimated $360 billion AUM, with the largest having around $85 billion AUM[1]. However, the majority of value ETFs, and therefore the majority of capital parked in these vehicles, track a handful of similar indexes[2]. One of them being the CRSP U.S. Large Cap Value Index[i], and another being the S&P 500 Value Index[ii], with these two indices also sharing many similarities to each other. 

With these conditions, we believe it can be difficult to distinguish value ETFs from one another, with most seemingly offering similar value propositions.

NVQ, Qraft’s AI-Powered Value ETF, however, offers a breath of fresh air in a space where innovation has been lagging for a while. Not only does NVQ have a comparatively radical method to value investing, but it has also outperformed the two benchmarks indices that most of the value ETFs closely mimic as well.

This illustration is for informational purposes only and does not represent actual investing results. 

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For current standard performance and expenses, visit https://qraftaietf.com/nvq

The Fund’s performance assumes the reinvestment of all dividends and all capital gains distributions.  Investors cannot directly invest in an index.

One of the reasons behind the overperformance of NVQ versus these indices is its new approach to valuing intangible assets. This process is made possible by Qraft’s vertical approach to utilizing its proprietary AI.

In the first stage, it can carefully parse vast amounts of data using Qraft’s Kirin API[iii], enabling the utilization of what believes is most appropriate data for a given task. The importance of intangibles in valuation can also change in relation to sector and market conditions. NVQ can use Natural Language Processing[iv] (NLP) to create accurate blended sector labels to assess which the mix of businesses a company may have. Building on this foundation Qraft AI is able to use its data and AI powered processing to assess Return on Research Capital (RORC) using R&D cost, patent, and marketing data.

This entire approach is packaged in a monthly and rebalanced, actively managed ETF, which allows NVQ to be flexible in changing its positions based on not only market conditions but as well as recent news and developments. It provides a unique approach that is both transparent and liquid, which allows investors exposure to a new side to value investing.

The proof in NVQ’s divergence from the value ETF industry norm is shown in its differences in sector weights. A quick glance comparing the composition of sector weights of NVQ and that of the S&P 500 Value Index can visualize the differences between the two approaches to valuation.

The stark differences in sector weighting can only be translated into different holdings as well, which itself will naturally lead to divergences in performance from the norm. This is illustrated by the top 5 holdings of NVQ and its leading competitors in the value ETF category. We believe having a flexible sector strategy is important especially given the current trends in the last few years. With the current uncertainty in yields and rising inflation, it may be difficult for investors to find flexible ways to hedge their investments. Certain sector performances have started to diverge from economic cycles, as was the established norm. So far in 2021, we have seen how many sector thematic ETFs, especially in the tech sector have overwhelmingly underperformed compared to previous years.

With market conditions that many are not familiar with, it may be worthwhile to check out new and different approaches to the same old trick. Without even considering performance, it is clear from the differences in sector weights that NVQ provides an approach that most investors do not have exposure to.

[1] “81 Value ETF Reports: Ratings, Holdings, Analysis - Etf.com.” Etf.com, https://www.etf.com/channels/value-etfs.

[2] “The Obvious Flaw in 'Value' Index Funds.” Orbis.com, Orbis, July 2019, https://www.orbis.com/au/adviser/insights/insights/the-obvious-flaw-in-value-index-funds.

[i] CRSP Large Cap US Value Index: Center for Research in Security Prices value version of its US Index.

[ii] S&P 500 Value Index: Measures value stocks using three factors: the ratios of book value, earnings, and sales to price. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments. Constituents are drawn from the S&P 500.

[iii] Kirin API: Qraft’s proprietary API, integrates multiple vendors to provide both macroeconomic and company fundamentals with the correct point-in-time data.

[iv] Natural Language Processing: Refers to the branch of computer science concerned with giving computers the ability to understand text and spoken words in much the same way human beings can.