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South Korean firm launches AI ETFs

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Beverly Chandler conducts a Q&A interview with South Korea’s Qraft Technologies, led by CEO Hyungsik Kim, pictured. 

Can you give me a bit of background on your company?
We, Qraft Technologies, Inc, are an artificial intelligence (AI) technology start-up company based in Seoul, South Korea. Among various industry fields where AI can contribute to, we have specialties in the financial investment area and develop AI systems for portfolio investment management and trade execution.

Different from many other AI technology firms, since the establishment in 2016, we have been delivering our AI systems to end customers in the form of financial products in cooperation with financial institutions in Canada, South Korea and the US.

In November, 2017, we launched the world’s second AI Managed ETF, Horizons Active A.I. Global Equity ETF (TSX: MIND), in cooperation with Horizons ETFs Management (Canada) Inc. And last month we added two more AI Managed ETFs, Qraft AI-Enhanced US Large Cap ETF (NYSE Arca: QRFT) and Qraft AI-Enhanced US Large Cap Momentum ETF (NYSE Arca: AMOM), to our product list in cooperation with Exchange Traded Concepts, LLC.

Also, we are the largest Robo-Advisor solution provider in South Korea. The total assets advised by our Robo-Advisor systems are now about USD1 billion. In South Korea, the term of Robo-Advisor usually means a mutual fund sales tool that mainly retail banks use when recommending a pool of mutual funds to their customers based on their risk profile and help them rebalance their fund portfolios periodically. So, most of the major retail banks in South Korea use Robo-Advisor systems for fund sales and four of them including KEB Hana Bank and Shinhan Bank are using our Robo-Advisor systems.

In addition, we are also developing an AI run trade execution system that could assist a trader to buy or sell a single asset (such as stock, commodity, currency, etc.) at a favourable average price especially compared to a volume or time-weighted average price within a designated time period. With regards to this AI run trade execution system, we are in the process of applying for global patents and have been working with a brokerage firm and a cryptocurrency exchange in South Korea respectively to introduce the new system to end customers like we do with AI Managed ETFs and Robo-Advisor.

Thanks to the high synergy effects of our AI systems with financial products, some of the major financial institutions in South Korea including Mirae Asset Financial Group, Hana Financial Group, Shinhan Bank and Industrial Bank of Korea are investing in our company and holding a significant ownership.
 
How did you start your ETF?
Basically, we have a strong belief in AI managed investment products. Especially, when AI combines with quantitative investment products, we believe AI could do much better than human portfolio managers in pursuing the original investment objectives of such products. More specifically, human portfolio managers tend to use fixed or manually adjusted variables to manage quantitative investment products and this often results in investment failures. However, AI could maintain (or at least continuously try to maintain) all the variables optimized to the latest financial information. And in our backtest, AI tended to increase its winning ratio against respective reference marks.

In the meantime, there could be many ways to deliver our AI system to end customers. For example, we have launched a number of AI backed mutual funds in cooperation with asset managers and insurance companies in South Korea. However, we wanted to reach more investors and globally if possible. This is why we decided to launch private labeled ETFs through a white label ETF issuer and list them on a U.S. stock exchange. As we explained above, we are the largest Robo-Advisor solution provider in South Korea but non-residents or other bank customers cannot access to our Robo-Advisor systems. However, US-listed AI Managed ETFs have no such limits and it makes very easy for us to recommend our ETFs to our friends. “Like Google or Amazon stocks, buy our AI Managed ETFs.”
 
What is it about the AI sector that you like?
Here we don’t want to repeat that AI is free from emotions and biases so that it makes a big difference in investments. Rather, we want to highlight the outcome of AI systems can be measured and something that can be measured can be improved. In addition, an AI system is designed with a clear system goal and as long as the architecture of the system is maintained, the performance of the systems also highly tends to be maintained. This is why we believe the financial investment industry should be a leader in adopting AI technologies because they often suffer from human failures.
 
What does if offer investors?
Our AI Managed ETFs, for example, are designed to enhance the performance of broad market indices. And if they show alpha returns against broad market indices up to date, you can bet they highly will do in the future as well. We cannot say exact numbers here but can say their winning ratios against respective reference marks in the backtest were very stable throughout the simulation period. So, if you are investing in delta one ETFs, you can allocate a portion of your investment to our AI Managed ETFs to enhance your portfolio investment return without an investment universe change.
 
How do you do your research?
In 2017, we established an AI research center, Mirae Asset AI Financial Research Center, together with Korea University and Mirae Asset Financial Group. So, while the research centre leads fundamental and academic AI technology researches, our AI and data engineers more focus on the application of the new technologies to final products.
 
What is your target audience?
We are making very sophisticated investment products but our audience doesn’t have to be that sophisticated as well. We would like to introduce our products and ourselves to anyone interested in ETFs and the application of AI technologies.
 
Do you have other ETFs?
We are now planning to launch a US high dividend ETF during the second half of the year. The new AI Managed ETF will invest in US high dividend stocks only but aim to outperform broad market indices. Our backtesting results were quite interesting and we want to bring it to the market as soon as possible. Then, we will continue to add more ETFs to our product line-up.

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