Transforming Conventional Momentum Investing with AI - A Case for AMOM
Momentum investing is widely regarded as a reliable strategy, capitalizing on existing market trends. It utilizes predefined rules based on technical indicators to identify optimal entry and exit points for stocks. However, in 2023, frequent market shifts posed challenges for investors employing momentum strategies. Predicting market trends using static rules became increasingly difficult amid geopolitical conflicts and uncertainties in monetary policy. To navigate the dynamic market landscape effectively, a more adaptable approach is required.
The iShares MSCI USA Momentum Factor ETF (MTUM), which many tend to use as a proxy for the momentum factor, for example, had one of its worst years. On the other hand, a momentum strategy, powered by Artificial Intelligence (AI), the Qraft AI-Enhanced U.S. Large Cap Momentum ETF (AMOM), had one of its best years. This showcases how AI and active management have the potential to adjust to market volatility and provide an important tool for an investor’s portfolio.
Why AI
While we understand that a comprehensive understanding of the market is the key to successfully navigating and forecasting trends, most investors lack the time and resources to achieve this. Especially in today’s market with swift changes influenced by dynamic macroeconomic factors, it can be challenging for human investors to track every piece of data and information in real-time. However, AI can tirelessly process extensive amounts of market information, at speeds beyond human capacity. Not only that, but it can also eliminate the impacts of human emotions, potentially minimizing biases such as fear and greed while making investment decisions.
How AMOM Works
Since its inception in 2019, AMOM has harnessed the power of AI to offer investors an active approach to momentum investing. Qraft's AI engine employs a dynamic and flexible strategy, utilizing a wide range of momentum factors across short- to long-term periods. Its goal is to identify the top 50 stocks from its large-cap universe that show the highest conviction for the upcoming month. By leveraging this adaptive methodology, Qraft's AI engine can effectively capture opportunities aligned with its momentum-based investment strategy. It swiftly adjusts its stock portfolio to maximize potential returns while minimizing exposure to underperforming stocks, providing investors with a proactive and responsive approach to momentum investing.
This year, AMOM has a 21.17% return year to date and a 12.29% annualized return since inception, as of November 30, 2023. Comparing this to the iShares MSCI USA Momentum Factor ETF, MTUM, which has a 4.20% return year to date, and a 7.64% annualized return since AMOM’s inception (See full standardized performance: AMOM, MTUM).
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.
Total Return Comparison Since Inception
Source: Bloomberg
Date as of 2023-11-30
Note: Rebased at 100 as of the inception date
This demonstrates AI's capabilities in offering investors a differentiated approach to momentum portfolio construction, as well as the ability to have a more active approach to shifting markets as it is rebalanced every month. Therefore, employing AI has the potential to bring a new approach for those seeking exposure to the momentum factor, playing a pivotal role in effective investment decision-making.
Reference
Important Information
S&P 500: The S&P 500 Index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization, Investopedia
QRAFT AI-Enhanced US Large Cap Momentum ETF (AMOM)
Investment Objective: Capital Appreciation
Costs & Expenses: 0.75%
Liquidity: Because the Fund is an ETF, only a limited number of institutional investors (known as “Authorized Participants”) are authorized to purchase and redeem shares directly from the Fund. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, shares of the Fund may trade at a material discount to their net asset value (“NAV”) per share and possibly face delisting: (i) Authorized Participants exit the business or otherwise become unable to process creation and/or redemption orders and no other Authorized Participants step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The fund is subject to risks including, but not limited to common stock risk, issuer-specific risk, large capitalization risk, limited authorized participants, market makers, and liquidity providers risk, management risk, market risk, model and data risk, new/smaller fund risk, non-diversification risk, operational risk, portfolio turnover risk, sector focus risk, and trading risk.
Guarantees or Insurance: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Fluctuation of Principal or Return: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Tax Features: Distributions from ETFs are subject to taxation.
Behavioral Bias: Behavioral biases are irrational beliefs or behaviors that can unconsciously influence our decision-making process. Emotional biases involve taking action based on our feelings rather than concrete facts, or letting our emotions affect our judgment. Cognitive biases are errors in our thinking that arise while processing or interpreting the information that is available to us.
QRAFT AI-Enhanced US Large Cap Momentum ETF (AMOM)
Investment Objective: Capital Appreciation
Costs & Expenses: 0.75%
Liquidity: Because the Fund is an ETF, only a limited number of institutional investors (known as “Authorized Participants”) are authorized to purchase and redeem shares directly from the Fund. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, shares of the Fund may trade at a material discount to their net asset value (“NAV”) per share and possibly face delisting: (i) Authorized Participants exit the business or otherwise become unable to process creation and/or redemption orders and no other Authorized Participants step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The fund is subject to risks including, but not limited to common stock risk, issuer-specific risk, large capitalization risk, limited authorized participants, market makers, and liquidity providers risk, management risk, market risk, model and data risk, new/smaller fund risk, non-diversification risk, operational risk, portfolio turnover risk, sector focus risk, and trading risk.
Guarantees or Insurance: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Fluctuation of Principal or Return: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Tax Features: Distributions from ETFs are subject to taxation.
Behavioral Bias: Behavioral biases are irrational beliefs or behaviors that can unconsciously influence our decision-making process. Emotional biases involve taking action based on our feelings rather than concrete facts, or letting our emotions affect our judgment. Cognitive biases are errors in our thinking that arise while processing or interpreting the information that is available to us.
iShares MSCI USA Momentum Factor ETF (MTUM)
Investment Objective: The iShares MSCI USA Momentum Factor ETF (the “Fund”) seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum.
Costs & Expenses: 0.15%
Liquidity: Only authorized participants (“APs”) may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that may act as APs and such APs have no obligation to submit creation or redemption orders. Consequently, there is no assurance that APs will establish or maintain an active trading market for the Shares. This risk may be heightened to the extent that securities held by the Fund are traded outside a collateralized settlement system. In that case, Aps may be required to post collateral on certain trades on an agency basis (i.e., on behalf of other market participants), which only a limited number of APs may be able to do. In addition, to the extent that Aps exit the business or are unable to proceed with creation and/ or redemption orders with respect to the Fund and no other AP is able to step forward to create or redeem Creation Units, this may result in a significantly diminished trading market for Shares, and Shares may be more likely to trade at a premium or discount to the Fund’s net asset value (“NAV”) and to face trading halts and/or delisting. Investments in non-U.S. securities, which may have lower trading volumes, may increase this risk. The Fund faces numerous market trading risks, including the potential lack of an active market for the Shares, losses from trading in secondary markets, and disruption in the creation/redemption process of the Fund. Any of these factors may lead to the Shares trading at a premium or discount to the Fund’s NAV.
The fund is subject to risks including, but not limited to, Authorized Participant Concentration risk, equity risk, index risk, industry concentration risk, healthcare sector risk, issuer-specific risk, market risk, market trading risk, momentum investing risk, non-correlation risk, non-diversified fund risk, and operational risk.
Guarantees or Insurance: An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any government agency.
Fluctuation of Principal or Return: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Tax Features: The Fund’s distributions generally are taxed as ordinary income, capital gains, or some combination of both, unless you are investing through a tax-advantaged arrangement, such as a 401(k) plan or an individual retirement account; in which case your distributions may be taxed as ordinary income when withdrawn from such account.