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.