A strong management team and sound investment process underpin HCM Defender 100 Index ETF's Morningstar Medalist Rating of Bronze. Fees are a weakness here. The strategy's lofty fees are a high hurdle to clear, as it is priced within the second-costliest quintile among peers.  

 The team managing the passive strategy drives the strategy's Above Average People Pillar rating. The strategy's effective investment approach earns an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight yield exposure and liquidity exposure compared with category peers. High yield exposure is attributed to holding more stocks with high dividend or buyback yields. And a high liquidity exposure is rooted in stocks with higher trading volumes, lending managers more flexibility. The strategy's parent organization is industry standard, albeit with some strong attributes like a favorable lineup success ratio, but is held back by a bench of limited-tenure portfolio managers. This earns the firm an Average Parent Pillar rating.

Analyst Rating

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Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. HCM Defender 100 Index ETF earns an Above Average Process Pillar rating. The main driver of the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The parent firm's five-year risk-adjusted success ratio of 67% also influences the rating. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. Their respectable success ratio suggests that the firm does well for investors and that this fund may benefit from that. Lastly, the process is limited by high costs across its parent firm's funds, whose fees rank in their category's second-costliest quintile on average. While this fund's costs are most relevant to investors, the pattern at the broader firm suggests it could do more to keep expenses low.

The investment strategy as stated in the fund's prospectus is:  The investment seeks to provide investment results that correspond, before fees and expenses, generally to the performance of the HCM Defender 100 Index.  The fund seeks to achieve its investment objective by investing at least 80% of its net assets, including borrowings for investment purposes but exclusive of collateral held from securities lending, and in securities included in the index. The index seeks to outperform the Solactive US Technology 100 Index using a proprietary methodology. 

 The portfolio is overweight in technology and communication services relative to the category average by 14.8 and 5.2 percentage points, respectively. The sectors with low exposure compared to category peers are healthcare and financial services, underweight the average by 8.3 and 8.2 percentage points of assets, respectively. The portfolio is positioned across 100 holdings and is quite concentrated. In particular, 64.5% of the strategy's assets are housed within the top 10 holdings, as opposed to the category’s 52.5% average.

Above Average

Process

HCM Defender 100 Index ETF's strong team drives the strategy's Above Average People Pillar rating. The fund takes a solo manager approach, with Vance Howard as the only listed manager at the helm, who brings 21 years of portfolio management experience to the table. They manage a total of 20 strategies, with an asset-weighted average Morningstar Medalist Rating of Neutral. This means, in aggregate, they fall short and will struggle to produce positive alpha relative to the category median. With only one manager listed on the strategy, the passive strategy is vulnerable to key-person risk.

People

Howard CM is an industry-standard asset manager, resulting in an Average Parent Pillar rating. Even with an average pillar rating, Howard CM has had impressive longevity among its product shelf. The firm's success ratio is 91%, meaning that 91% of its strategies have both survived and beaten their respective category median. A high success ratio indicates good performance and provides insight into a firm’s discipline around investment strategy and product development. With an average tenure of eight years among the longest-tenured managers at Howard CM, the firm is on par with peers. Seasoned teams tend to have more experience to draw upon should they need to weather turbulent market conditions. Fees on open-end and exchange-traded funds are a weakness of the firm, contributing negatively to the rating. On average, expenses on its funds are within the most expensive quintile compared with category peers. With the current market environment of fee compression, this is cause for concern, as investors may flock over time to alternate asset managers to get a better deal.

Average

Parent

HCM Defender 100 Index ETF

QQH tracks a proprietary index that toggles between technology stocks and Treasurys, or a combination of both, depending on risk in the U.S. equity market.

The HCM Defender 100 is an innovative ETF that uses a proprietary quant signal to determine its allocation between equities and cash. The fund switches its allocation based on a proprietary trend signal, alternating between a 100% Nasdaq allocation and 100% in cash at the other extreme, with blended levels in-between. The fund is overweight in mega-cap tech stocks and has performed in line with the Nasdaq this year being up over 41%.

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