To The Moon

When constructing a portfolio, investors must analyze a large number of stocks. For fund managers, even top professionals can make mistakes. Emotions can skew decisions, leading them away from logic and data. To counter this, some managers use algorithms to eliminate human biases and emotions, resulting in quantitative funds.

Unlike traditional funds that rely on manager decisions, quantitative funds use AI for analysis. Matt Ahrens, Partner and CIO at MN Wealth Advisors, explains that quantitative funds cater to both long-term investors and short-term traders. These algorithms process vast data sets to make buy and sell decisions, avoiding the influence of human emotions like fear and greed.

Considerations Before Investing in Quantitative ETFs

Investing in quantitative mutual funds or exchange-traded funds (ETFs) is a significant decision. While it might help achieve financial goals faster, it also comes with risks. Some investors believe quantitative funds can offer higher returns at the cost of higher risk.

When choosing a fund, consider the following:

• Expense Ratio: Quantitative ETFs typically have higher fees compared to passive funds without advanced technology.

• Portfolio Composition: Check the individual stocks in the fund and how the manager allocates funds.

• Historical Returns: While past performance doesn’t guarantee future results, it can be a useful reference.

• Risk Tolerance: Quantitative ETFs generally carry higher risk but also offer potential for greater returns. Assess your long-term financial goals and risk tolerance.

Pros and Cons of Quantitative ETFs

Before investing in quantitative ETFs, weigh their advantages and disadvantages. A major benefit is the removal of human emotions and biases, and some funds may deliver returns above industry benchmarks using advanced technology.

However, Michael Collins, Founder and CEO of WinCap Financial, notes that drawbacks include higher management fees and potentially poor performance in highly uncertain or volatile markets.

Here are some U.S. quant ETFs worth considering:

$J.P. MORGAN NASDAQ EQUITY PREMIUM INCOME ETF(JEPQ)$ : With a 30-day SEC yield of 9.9% and an expense ratio of 0.35%, this ETF has returned 13.9% year-to-date (as of August 27). Launched in May 2022, it has grown from $5 billion to $16 billion in assets. JEPQ focuses on high income and low volatility by tracking out-of-the-money Nasdaq 100 call options.

$iShares U.S. Equity Factor ETF(LRGF)$ : This ETF offers a 30-day SEC yield of 1.3% and has an expense ratio of 0.08%, with a year-to-date return of 19.9%. LRGF invests in 279 stocks, concentrating on large tech companies. Its top three holdings— $Apple(AAPL)$ $NVIDIA Corp(NVDA)$ $Microsoft(MSFT)$—make up nearly 20% of its $2.1 billion in assets.

$JPMORGAN MARKET EXPANSION ENHANCED EQUITY ETF(JMEE)$ : With a 30-day SEC yield of 1.2% and a 0.24% expense ratio, JMEE has returned 11.7% year-to-date. Founded in May 2022, it aims to outperform the $S&P 500(.SPX)$ . Despite its $1.3 billion in assets, it boasts a 15-year annualized return of 12.3%.

$ALPS O'Shares U.S. Quality Dividend ETF(OUSA)$ : This ETF provides a 2.0% 30-day SEC yield and has a 0.48% expense ratio, with a year-to-date return of 15.2%. Managing $806 million, OUSA invests in high-quality, low-volatility dividend growth stocks, with nearly a quarter of its assets in tech, primarily large and mid-cap companies.

$SPDR MSCI EAFE StrategicFactors ETF(QEFA)$ : Offering a 30-day SEC yield of 2.6% and an expense ratio of 0.30%, QEFA has a year-to-date return of 11.7%. It has $977 million in assets, investing in Europe, Australasia, and the Far East, and pays dividends twice a year.

$Vanguard U.S. Momentum Factor ETF(VFMO)$ : With a 30-day SEC yield of 0.6% and an expense ratio of 0.13%, VFMO has returned 20.5% year-to-date. It holds 612 stocks with a median market cap of $12 billion, with tech and industrials each making up around 18% and 20% of the portfolio. It has a high turnover rate of 73%.