Investors may analyze many stocks as they carefully construct an investment portfolio. Fund managers do this for a living, but even the top professionals make mistakes. Emotions can lead people astray from making investment decisions based on logic and data.
Some fund managers prefer to swap human bias and emotion for algorithms that make investments based on predefined criteria. That’s where quant funds come into play. These are different from ordinary funds because instead of active managers relying solely on their own judgment calls, artificial intelligence does the legwork for them.
[Sign up for stock news with our Invested newsletter.]
Matt Ahrens, partner and chief investment officer at MN Wealth Advisors, says quant funds can cater to both long-term investors and people who want to profit from day trading.
“A quant fund can be more tactical and trade frequently based upon trading signals like momentum and relative strength, or it can be more passive and focus on a wide swath of companies that score high on things like value or quality (i.e., high cash flow). All of the trading signals are predetermined by an algorithm, and qualitative analysis by human managers isn’t considered.”
Quant algorithms use vast datasets to inform decisions to buy or sell stocks. Fear and greed do not contribute to any transactions within a quant algorithm.
What to Consider Before Buying a Quant ETF
Investing in a quant mutual fund or exchange-traded fund (ETF), or any asset, is a significant decision. While investing can help you achieve your financial goals sooner, it also comes with risks. But along those lines, some investors believe a quant fund can help you get a higher return on your capital for the risk you’re taking. You’ll want to keep these basics in mind when picking a fund:
Expense ratio. The expense ratio represents the percentage of assets you’ll have to pay each year to hold shares in the fund. Quant ETFs tend to have higher expense ratios than passively managed funds that don’t use advanced tech.
Portfolio allocation. Investors should review the individual stocks in a fund and how the fund managers distribute capital across sectors.
Historical returns. While historical returns do not guarantee future success, it’s good to see if a fund has a history of performing well. A quant fund that has dramatic surges and dips depending on the year comes with more risk.
Your risk tolerance. Most quant ETFs are very risky but can generate sizable returns. It’s important to assess your long-term financial goals and how much risk you want to incur.
Quant ETFs vs. Smart Beta ETFs
Quant ETFs and smart beta ETFs are both unconventional funds. While quant funds focus on quantitative analysis, smart beta funds focus on specific long-term factors that can influence a fund’s performance, such as dividends. Active quantitative strategies may incorporate more customized indexes and use sophisticated algorithms or quantitative analysis focused on short-, medium- or long-term factors.
Both of these types of funds have higher expense ratios than passively managed ETFs. However, quant ETFs and smart beta ETFs both have the potential to outperform the stock market in the long run.
Pros and Cons of Quant ETFs
Before buying shares in a quant ETF, consider the strengths and weaknesses of such a strategy. The main advantage is the removal of human emotion and bias. Some of these funds deliver higher returns than industry benchmarks because of their advanced technology that averts the behavioral perils of investing.
However, there are noteworthy cons to keep in mind. Michael Collins, a chartered financial analyst, founder and CEO of WinCap Financial, gives a few examples: “Some cons associated with quant ETFs include high management fees as a result of the complex technology used, which can eat into potential profits.” He adds, “Another con is that these funds may not perform well in highly unpredictable or volatile markets, as the models may not be able to accurately predict sudden changes.”
At the end of the day, investors want to see their money increase over time. Some quant ETFs can outperform the market, but it’s important to do your research before buying shares in any fund. These are some of the top quant-based ETFs to consider from the safer side of the Street, meaning they’re from known fund providers with a reputation for turning out quality investment products:
| Quant ETF | 30-Day SEC Yield | Expense Ratio | YTD Return* |
| JPMorgan Nasdaq Equity Premium Income ETF (ticker: JEPQ) | 9.9% | 0.35% | 13.9% |
| iShares U.S. Equity Factor ETF (LRGF) | 1.3% | 0.08% | 19.9% |
| JPMorgan Market Expansion Enhanced Equity ETF (JMEE) | 1.2% | 0.24% | 11.7% |
| ALPS O’Shares US Quality Dividend ETF (OUSA) | 2.0% | 0.48% | 15.2% |
| SPDR MSCI EAFE StrategicFactors ETF (QEFA) | 2.6% | 0.30% | 11.7% |
| Vanguard US Momentum Factor ETF (VFMO) | 0.6% | 0.13% | 20.5% |
*Year-to-date performance by market price, including reinvested dividends, as of the market close on Aug. 27.
JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
The JPMorgan Nasdaq Equity Premium Income ETF strives to balance high income with low volatility. The $16 billion fund has a 0.35% expense ratio and a lofty 30-day SEC yield of 9.9%. The fund was launched in May 2022, and it has a 13.9% year-to-date return as of Aug. 27. JEPQ systematically tracks out-of-the-money Nasdaq 100 call options to generate monthly income for investors.
The fund’s growth has been remarkable, as it was a $5 billion fund at this time last year. Lead manager Hamilton Reiner’s three decades of experience in derivatives markets is an asset to the fund, which also uses equity-linked notes, or ELNs, mimicking earnings on call positions rather than holding the options themselves, according to Morningstar. Plus, the fund is built on the foundation of J.P. Morgan Asset Management’s reputation and extensive resources.
iShares U.S. Equity Factor ETF (LRGF)
The iShares U.S. Equity Factor ETF has a 0.08% expense ratio and prioritizes big tech companies like Apple Inc. (AAPL), Nvidia Corp. (NVDA) and Microsoft Corp. (MSFT). Those are the $2.1 billion fund’s top three holdings of 279, and they make up almost 20% of total assets. Amazon.com Inc. (AMZN), Broadcom Inc. (AVGO), Meta Platforms Inc. (META) and Alphabet Inc. (GOOG, GOOGL) are the next-largest positions.
LRGF has a 1.3% 30-day SEC yield, and it’s up by 19.9% year to date as of Aug. 27.
[7 Best Tech ETFs to Buy in 2024]
JPMorgan Market Expansion Enhanced Equity ETF (JMEE)
The JPMorgan Market Expansion Enhanced Equity ETF is up by 11.7% year to date and 22.2% over the past 12 months. JMEE has a 1.2% 30-day SEC yield, and its expense ratio is 0.24%. Launched in May 2022, JMEE strives to outperform the S&P 1000 Index. Over time, its lower fees, liquidity exposure and lower emphasis on momentum than peers have served the fund well. JMEE has a 15-year annualized return of 12.3%.
JMEE is a smaller fund than some of the others on this list, with $1.3 billion in total assets, but it invests in a large swath of stocks that prioritizes higher-quality holdings and underweights riskier ones.
ALPS O’Shares US Quality Dividend ETF (OUSA)
OUSA offers investors access to quality dividend growth stocks with low volatility and has delivered a 15.2% year-to-date gain. The fund has $806 million in assets under management and a 1.6% trailing-12-month yield. It has a 0.48% expense ratio.
The ALPS fund allocates almost a quarter of its total assets to information technology companies. Most of the stocks in the fund are large-cap or mid-cap companies.
SPDR MSCI EAFE StrategicFactors ETF (QEFA)
The $977 million QEFA is up by 11.7% year to date and offers a 30-day SEC yield of 2.6% with a 0.3% expense ratio. QEFA uses the MSCI EAFE Factor Mix A-Series Index as its benchmark and gives investors exposure to assets in Europe, Australasia and the Far East.
QEFA offers reduced volatility, and it distributes dividends twice per year. Its two managers have been on the job a while: Karl Schneider has been managing the fund since 2015, while Lisa Hobart has been on the management team since 2019.
Vanguard US Momentum Factor ETF (VFMO)
The Vanguard US Momentum Factor ETF uses a rules-based quantitative model to evaluate U.S. stocks. The fund has exposure to a wide range of stocks based on market cap size, sectors and industry groups. Investors will find 612 stocks in this fund with a median market cap around $12 billion. The tech industry makes up 18% of the fund’s total assets, with industrials at 20%.
VFMO has a 0.13% expense ratio and a 30-day SEC yield of 0.6%. The actively managed fund has delivered a year-to-date return of 20.5%. Nvidia is the largest position but only makes up 1.5% of the fund’s total assets, demonstrating a more diverse portfolio than common benchmarks like the S&P 500 and the Nasdaq. Broadcom and Arista Networks Inc. (ANET) round out the top three of VFMO’s portfolio, but they may not stay there long considering the fund’s 73% turnover rate.
More from U.S. News
9 Best ETFs to Buy for a Recession
7 Best Treasury ETFs to Buy Now
9 Spot Ether ETFs Available to Buy
6 of the Best Quant ETFs to Buy originally appeared on usnews.com
