2023-11-21 06:16:58 ET
Summary
- HCM Defender 100 Index ETF has an interesting methodology that aims to replicate the returns of the Nasdaq and transition to a more conservative stance when signals turn bearish.
- QQH's structure is driven by active management using trend analysis, automatically switching to lower-risk instruments in a risk-off environment.
- The fund's performance has been closely aligned with the Nasdaq, with notable outperformance in 2021, but it is susceptible to the risks of the tech sector.
It's good to cover ETFs that tend to not get much attention which have interesting methodologies. To that end, let's take a look at the HCM Defender 100 Index ETF ( QQH ), which I think has an interesting methodology which, although it hasn't generated meaningful alpha over the last several years, is worth keeping an eye on.
QQH is an ETF that primarily invests in equities and Treasury Bills (T-Bills). It strives to provide investment outcomes that align with the performance of the HCM Defender 100 Index. The fund is designed to replicate the returns of the Nasdaq when the market is trending upwards, and to transition to a more conservative stance with a higher cash allocation when the proprietary quantitative signals turn bearish.
The fund's structure is driven by active management using trend analysis. The fund automatically switches to lower-risk instruments when market signals suggest a risk-off environment. This alleviates the typical burden on a retail investor to individually decide when to move into lower beta instruments.
Understanding the HCM Defender 100 Index
The HCM Defender 100 Index forms the foundation of the ETF's investment approach. The index incorporates a proprietary quantitative program and trend analysis to choose between a pure technology equity allocation, a blend of equities and T-Bills, or a pure cash allocation.
The index is made up of securities from the Solactive US Technology 100 Index, which includes the largest and most liquid companies identified in the Technology sector. It also includes securities from the Solactive 1-3 month US T-Bill Index, which comprises U.S. dollar-denominated T-Bills with a maturity period of 1 to 3 months.
In essence, the HCM Defender 100 Index is a structured index that actively switches between 100% allocation to technology stocks and 100% allocation to cash via T-Bills. The index operates on four levers: 100% stocks, 70/30 stocks-cash, 40/60 stocks-cash, and 100% cash.
Composition of the HCM Defender 100
The fund consists of 100 positions, with a significant weightage given to the largest mega-cap tech stocks and a leveraged Nasdaq fund. The top 10 holdings make up over 60% of the fund's portfolio, which significantly influences the fund's performance.
The fund's portfolio predominantly is comprised of Large-Growth allocations. However, it's worth noting that the current market environment has led to valuations for Large-Cap Growth companies reaching stretched levels, making this an overvalued portfolio independent of tactical signals (at least for now).
Performance Analysis of the HCM Defender 100
Historically, the fund's performance has been closely aligned with that of the Nasdaq, with notable outperformance during the 2021 period. Although the fund underperformed during the significant market downtrend in 2022, it still had brief periods of outperformance as we can see from the price ratio below.
Pros and Cons of Investing in the HCM Defender 100
One of the key advantages of investing in the HCM Defender 100 is its dynamic allocation strategy. The fund's structure allows it to adapt to changes in market conditions, switching between equities and cash or cash equivalents based on proprietary signals. This can potentially protect investors from substantial losses during market downturns.
However, this approach also has its drawbacks. The fund relies heavily on its proprietary signals to drive its investment decisions. If these signals are incorrect or fail to anticipate market changes, the fund's performance could be adversely affected. Furthermore, the fund's focus on tech stocks makes it susceptible to the inherent risks of this sector.
Conclusion: Is the HCM Defender 100 a Good Investment?
The HCM Defender 100 offers a unique approach to investment, providing an automated, quant-driven algorithm that aims to mitigate risks during market downturns. This can be particularly beneficial for retail investors who often struggle with timing their investment decisions. I think it's an interesting fund, and one to keep an eye on should markets be in for a more tumultuous ride.
For further details see:
QQH: A Tactical Tech Play Worth Watching