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Some new ETFs are diving into meme stocks, chasing returns in an effort to attract assets.
However, a few actively managed ETFs are trying to navigate the mania for retail meme stocks, gambling on their ability to get out in time once the rally finally fizzles out, including Qraft AI-Enhanced US Next Value ETF and Principal Financial Group Inc. . Small cap US adaptive multi-factor ETFs.
Analysts say it’s too risky. Investors, from multi-billion dollar hedge fund managers to retail traders, often encounter short-term trading. Many get into bullish stocks too late or go out of business after losses begin to pile up.
“The positive momentum of these volatile securities may be short-lived,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “The new strong performance of actively managed out-of-the-gate ETFs could help capture investor interest in increasingly crowded markets, but that demand could disappear if losses pile up,” he said.
Qraft launched its fund in December, while the company began trading last month. With more than 2,000 ETFs in the US alone, the funds face stiff competition in attracting investors. The funds typically take up to five years to reach $100 million in assets — the threshold they must meet to stay in business, analysts say. Many chests fail to reach this limit and eventually close. One reliable way to attract investors is to post amazing returns.
Qraft’s $5.6 million ETF relies on artificial intelligence to screen stocks for value based on intangible assets such as intellectual property, and tries to predict what will perform best over the next month. Recent AI’s Top 100 monthly picks have included GameStop and AMC.
“Our AI model is based on increasing probability,” said Francis Jesock, managing director at Qraft. “So we’re betting on that possibility.”
Just like human fund managers, AI-backed funds can also struggle with timing. Qraft’s AI traded in and out of GameStop during February, March and April, exposing the fund to losses while losing some gains, according to FactSet. In June, the fund added AMC to its roster and retained GameStop.
Qraft fund shares are up 19% so far this year, versus 11% for the S&P 500.
“We have trial and error,” added Mr. Jisuke.
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Rather than letting the robot do the heavy lifting, fund managers at the core institution of the $6.3 million multi-factor adaptive small-cap ETF are taking a quantitative approach toward portfolio building. However, the end result is not much different: GameStop is the best ETF.
Manager’s ETFs select and weight stocks based on several factors, such as value, quality, momentum, and low volatility, as well as how risky the market as a whole is. The active component of the fund lies in the ability of portfolio managers to rebalance as needed unlike many other quantitative funds, which tend to rebalance on a schedule.
Fund manager Jeff Schwart says GameStop is the fund’s largest ownership because it is the largest component of the S&P SmallCap 600 Index.
“When we see high private risk, which is not explained by traditional market anomalies, we give investors the full market value weight of that name in our portfolio,” said Mr. Schwart.
The fund has held steady since its May 19 launch as several of its holdings — shares of value — have fallen in recent sessions, including GameStop, which is down nearly 4% for the month of June.
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Sure enough, GameStop and AMC appear in dozens of other ETFs, most of which are ineffective. AMC and GameStop are two of the largest stocks in Russell 2000, for example, making them a heavyweight in the $68 billion iShares Russell 2000 ETF.
However, active directors have more control over their entry and exit points, as well as how much they are exposed to a single stock.
Meb Faber, of Cambria Investment Management LP, is a rare active ETF manager who got in and out of GameStop early after realizing the potential risks of the rally.
Mr. Faber says he followed the rules he set out for the fund which dictate how much exposure any single stock can have. The ETF began selling GameStop shares again in the lead-up to January, unwinding a position the fund had held since 2013 — long before the video game retailer became the focal point of amateur traders. The fund, which focuses on companies that return the most cash to shareholders, is currently up 38% so far this year, making it one of the best ETFs of 2021.
Assets are about $359 million, with Cambria pulling in $224 million so far this year, according to FactSet.
Mr Faber said not selling “would have been a fool looking back”. “He would have made up 30% of the fund. That’s not what people are buying.”
Write to Michael Wursthorn at [email protected]
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