Qraft’s Next Value ETF made massive bets on U.S. energy stocks in October.
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An asset manager whose stocks are picked by artificial intelligence dumped shares in Facebook this month, as it made massive bets on U.S. energy companies.
AI-driven investor Qraft saw its robot trader reflect the pressure on Facebook shares and the impact of soaring oil prices on energy stocks as it made adjustments to two of its exchange-traded funds (ETFs). Qraft, a South Korean fintech, has more than $61 million in assets across four different ETFs.
Its Large Cap Momentum ETF (ticker: AMOM) exited its position in Facebook (FB)—previously the fund’s second-largest holding, at 7.5% portfolio weight—at the beginning of October. And Qraft’s Next Value ETF (NVQ) took major stakes in Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP), which now make up 24% of the fund’s holdings.
Facebook has come under intense scrutiny over the past month amid investigations by The Wall Street Journal and Congressional testimony from a company whistleblower that have reignited public debate over the social-media giant’s role in society.
CEO Mark Zuckerberg has pushed back against the allegations, which include Instagram’s detrimental impact on teenagers’ mental health, whether the Facebook algorithm encouraged social discord, and how the company moderates celebrities, politicians and other high-profile users.
Shares in the social-media giant have fallen 4.7% over the past month.
“Facebook woes continue,” said Francis Geeseok Oh, a managing director at Qraft and the head of its Asian-Pacific business, noting that the company was removed from AMOM’s holding as “it faces idiosyncratic risk” from the whistleblower allegations.
Meanwhile, energy stocks have been on a tear amid a global energy crunch and seemingly inexorable rally in oil prices. Shares in the three largest U.S. oil companies have soared over the past month, with Exxon Mobil gaining 18.4%, Chrevon climbing 18.5%, and ConocoPhillips surging 27%. Futures contracts for international oil benchmark Brent have risen more than 11% over the same period.
Oh said the energy sector has increased dramatically as a portion of NVQ’s holdings; less than 2% of the fund was made up of energy stocks in September, and the 14-fold increase was driven by the additions of the three U.S. major oil companies.
NVQ’s largest holding is chip maker Intel
(INTC)—as it was last month. Oh said the global shortage of semiconductors remains a key reason to be bullish on the stock. Intel has risen 11.3% so far this year.
“Supply-and-demand issues that started at the beginning of the pandemic have not abated,” Oh said. “Intel will continue to benefit from built-up demand on a multiyear basis.”
But the chip shortage, in turn, pinches automobile makers—and Ford (F) was one of the biggest removals from NVQ in October, having previously made up more than 3% of the fund.
“It struggles to overcome the semiconductor supply issues faced by most auto makers,” Oh noted. Otherwise, Ford stock has gained an impressive 92.4% in 2021.
As of October, the five largest holdings in NVQ are Intel, Exxon Mobil, Chevron, aerospace and defense group Raytheon Technologies (RTX), and ConocoPhillips. Its five largest additions this month, in addition to the oil giants, were heating and building systems specialist Johnson Controls (JCI) as well as another energy stock, EOG Resources (EOG).
NVQ is an actively managed ETF holding 100 large-cap U.S. stocks—picked and rebalanced each month using artificial intelligence focusing on a value investing strategy. The robot trader uses AI to measure companies’ intangible assets, which are often complex and difficult to weigh using traditional investment approaches, to pick stocks that are apparently undervalued.
The fund has been around since December 2020, and its market price has climbed 20.9% so far this year, outperforming its comparable index, the S&P Value Index (SPX), which has risen 19.2%.
AMOM, which has been listed in New York since May 2019, operates similarly, with a robot trader that capitalizes on the movements of existing market trends to inform the decision to add, remove, or reweight holdings. Artificial intelligence scans the market and uses its predictive power to analyze a wide set of patterns that show stock-market momentum.
While, as of this month, AMOM has slightly underperformed its benchmark over the past year—returning 24% to the S&P Momentum Index’s 26%—it has consistently been an outperformer over much of 2021.
AMOM’s five-largest holdings are tech giant Amazon (AMZN), retailers Home Depot (HD), Lowe’s (LOW), and Target (TGT), and consumer-goods group Colgate-Palmolive (CL). Its five largest additions in October were Lowe’s, Target, Colgate-Palmolive, digital scanning and orthodontics specialist Align (ALGN), and electronic-agreement company DocuSign (DOCU).
Qraft’s two other AI-picked ETFs are a U.S. large cap index ( QRFT
) and a U.S. large cap dividend index ( HDIV
).
The entrance of AI-run funds onto Wall Street promised a new high-tech future for investing, though it hasn’t quite lived up to the hype yet. Theoretically, researchers have shown that AI investing strategies can beat the market by up to 40% on an annualized basis, when tested against historical data.
But Vasant Dhar, a professor at New York University’s Stern School of Business and the founder of machine-learning-based hedge fund SCT Capital Management, argued on MarketWatch in June 2020 that AI-run funds won’t “crack” the code of the stock market.
Advocating caution, Dhar said that it was difficult for funds underpinned by machine learning to maintain a sustainable edge over markets, which have “a nonstationary and adversarial nature.” He advised investors considering an AI system to ask tough questions, including how likely it is that the AI’s “edge” will persist into the future, and what the inherent uncertainties and range of performance outcomes for the fund are.
Write to Jack Denton at [email protected]
