Nobody Is Talking About How Bad QTUM Is.

[00:00:00]The largest quantum computing ETF in the world, QTUM, is not what it seems at all. I spent the entire day looking under the hood of this $6 billion quantum computing ETF, which everyone can't stop talking about.

[00:00:14]After a decade researching quantum computing and a decade on Wall Street, I was shocked by what I found. Now, on the tin, everything seems fine. Look, folks, invest in the quantum computing revolution, it says. Then you keep reading and some clues start surfacing that maybe this is more than just the quantum computing revolution or machine learning, it says. Embedded AI chips, big data software. What exposure do you actually get with an investment in the Defiance Quantum ETF? We'll get to that in a second, but one thing is really clear here that this ETF is getting a lot of attention. Assets under management have nearly tripled in the past 10 months. Now, contrary to what you'll read on Reddit, that doesn't really mean much at all. ARK Invest captured more AUM than perhaps any other thematic investor out there, and that made them extremely successful. Doesn't mean their investors saw superior performance, does it? The reason that you want to see a lot of assets in any ETF is because the provider can lower their fees and still make money off the ETF. As Morningstar has shown us, low fees are the biggest predictor of a fund's outperformance relative to its peers. It's intuitive, right? In this case, QTUM charges 40 basis points or about 2/5 of a percent. That's lower than average for an actively managed ETF, but don't expect to get compensated for those fees. Another Morningstar study shows us that 95% of active managers can't outperform their benchmark over a decade or longer. Now, QTUM is quick to point out that Morningstar rates their fund as a top performer over the last 3 years and the last 5 years. It's kind of like a 25-year-old life coach in Bali.

[00:01:58]Attractive on the tin, hot, young, tan, but that's about as deep as it goes.

[00:02:04]Past performance starts to somewhat matter over a decade or longer, not over shorter time frames. And even over longer time frames, honestly, it means very little. That's why professional investors focus a lot on exposure. And to understand the exposure we get from any given ETF, we need to look at the underlying index methodology. So, the index QTEM runs off of is called the BlueStar Machine Learning and Quantum Computing Index. It's from Market Vector. This is a modified market cap weighted index, so they're rebalancing based on end positions in the portfolio.

[00:02:39]They equally balance it. Here's a new word I'm not familiar with, "explicative". And when we dig into their methodology, we see this bit here.

[00:02:47]They say pure play thematic screening.

[00:02:50]Yeah, we know it's a theme, and they have two categories. You see quantum computing and machine learning. Under machine learning this bullet point here, semiconductor manufacturing equipment, that's doing a lot of heavy lifting. And if you keep reading, you see something interesting. So, they talk about for new securities that are going to potentially be added in the index, they need to have at least 50% of annual revenues exposed to quantum computing. However, for stocks that are already in the index, they don't mention anything about that, which is very interesting. So, whilst this may drift more towards quantum computing over time in terms of exposure, what exposure are we getting today? So, 8% of the exposure is for the largest companies in the world. Sure, Microsoft, Google, Amazon, they're dabbling in quantum computing, but current exposure is zero, and future will be likely next to zero because they're the largest companies in the world. Of course, Google loves the public relations. I think it was back in 2019 they declared quantum supremacy. We wrote about that. Since then, they've had multiple press releases about all the grand things they're doing. usually amounts to very little. Basically, it's their researchers pushing out some PR so they can keep their funding, right? And you see here they have a handful of SAS companies. Now, there's nothing wrong with these names. We're holding three of them actually. We've covered all of them for years, but I can tell you there's no quantum exposure here. Remember what I said earlier about semiconductor equipment doing a lot of the heavy lifting? Well, here you go. 11% exposure in some very familiar names. Certainly seeing a few we like. There's one upcoming champion in there, Qualcomm, that's in our DGI strategy Quantinuum, but these are not quantum computing companies. Now, of course, we need to throw some Asian names into the mix for some diversity. Some from China, some from Japan.

[00:04:36]>> So, are you Chinese or Japanese?

[00:04:39]>> Now, Japan is making a lot of quantum investments these days, but that's not the exposure you're getting from this set of companies. And let's be honest here, folks. No ETF is complete without that household name everyone's talking about.

[00:04:53]>> Moebius.

[00:04:54]>> And then Coreweave gets thrown in for some reason, but not Ion. Ion, you've been a bad, bad boy. And that brings us to the OGs of American technology, names everyone ought to be familiar with. And finally, we see a glimpse of something interesting here, IBM. They're pouring billions of dollars into quantum computing with a commercial quantum computer planned for 2029. The reality is that an investment in IBM today represents $68 billion of revenues that come from everything but quantum computing. When they finally, hopefully, do start realizing some meaningful quantum revenues, it's still going to take quite a while before they become a significant part of that top line. Up next, we have defense companies, and the only name on this list worth noting really is Honeywell. That's because they're the majority owner of one of the better quantum computing companies out there, Quantinuum, which just had an IPO we covered. So, why not just buy Quantinuum and quit messing around? Now, I know what you're thinking, Joe, we've already covered half of the stocks in the ETF and you haven't even started talking about any of the quantum computing names. I know, I'm getting bored, too. You think I like standing here in this ancient Japanese cemetery sweating my balls off? I do, actually.

[00:06:07]It's a pretty nice place. But, I'm trying to make a point here. Remember what I was saying earlier about exposure? What are you paying 40 basis points for? While you mull that over, let's try to speed things up a bit. I asked our intern Krog to go through the remaining names and identify all the stocks that claim to offer pure play exposure to quantum computing. Another 30 names got dropped off the list. You can see here there's nothing inherently wrong with these companies, but they don't offer the exposure to quantum computing, which is what we're looking for. So, after excluding all the companies in this index ETF that don't offer quantum computing exposure, here's what we're left with. 15 names that represent a mere 15% of this ETF's exposure. That's what you're paying 40 basis points for. But, that's not the end of the story. The next step isn't to vet the quality of these names yet. It's simply to make sure they actually do offer pure play exposure. For example, companies with no revenues, they don't offer exposure to anything. Quantum Emotion would be one of those. This is an article from Adhoc News, just came out hot off the presses this morning.

[00:07:15]They talked about how in the first quarter of this year this firm reported their first commercial revenues, a whopping 11,000 Canadian dollars. Until you hit 10 million dollars per year or more, we don't consider that meaningful revenues. We avoid pre-revenue companies like the plague. They haven't proven product market fit. They're just a team with a dream. In many, many cases, these companies end up burning out or going bankrupt. It's probably one of the most effective rules we have. Don't invest pre-revenue. Companies that don't have revenues shouldn't be publicly traded.

[00:07:49]Sure, there are exceptions like drug developers, but companies that haven't developed a product or service that we can determine whether or not it's economically viable by looking at gross margins, they shouldn't be publicly traded. That's the domain of venture capitalists. And of course, a lot of these companies managed to go public using SPACs, and we know that retail investors got their asses handed to them over and over with the SPAC method. That brings us to Arqit Quantum, another company. Read this from left to right with no revenues, pass. Then you have Horizon Quantum Holdings that saw $50,000 in revenues last quarter. We generate more revenues than this company does, so maybe we ought to attach the word quantum to our name, and then we'll have a $1.5 billion valuation. More of the same from BTQ. And speaking of adding quantum to your name, you'll notice in this list of the 15 stocks, quite a few have quantum in the name.

[00:08:42]You need to be very careful. That's like back several decades ago when we had the big boom in nanotechnology, and every company was adding nano to their name.

[00:08:49]Also, you see that with AI. Just append the word AI, and suddenly your valuation goes up, right? So, be very careful.

[00:08:54]This is somewhat like the Hathaway effect where mentions of Anne Hathaway were actually boosting Berkshire Hathaway. It's quite a quite interesting, right? How a simple name change can affect the valuation of your company. Now, I've crossed out the names here that don't have meaningful revenues. Then, once you have firms with meaningful revenues, then you start asking questions like, where are the revenues coming from? Are they simply the result of a firm that's cobbling together revenue growth by making tons of acquisitions, some that aren't that appealing? That would be IonQ. Then you have names like D-Wave and Rigetti, not growing their revenues. If you're not growing revenues, you're not capturing market share, what are you even doing?

[00:09:31]So, at any rate, at least we have some quantum names here that we can look at.

[00:09:36]We've looked at all of these names in the past. So, some takeaways here. The actual quantum exposure in QTUM is minimal. That's cuz of two reasons, okay? Pure play names out there, of which there are not many. We saw that, right? They don't offer enough liquidity to run a large ETF on. There aren't enough pure play names to form an ETF, so they start doing all this mental gymnastics to bring together firms and appending definitions and changing them to accommodate a large ETF, which they've done. And it's attracted assets, and that's great. They're making a whole bunch of money. But, that's not great for Joe retail investor who wants exposure to quantum computing and thinks that's what he's getting when it's not the case. Now, the ETF is structured to accommodate new quantum names as they emerge 5 years from now, right? 5 years, always 5 years away, when a commercial quantum computer arrives finally, then we can see how much this has changed.

[00:10:29]Until then, this isn't an ETF that we would invest in for quantum exposure.

[00:10:33]Now, I'm sure that some of you are going to point to WQTUM. So, that's the WisdomTree Quantum Computing Fund that debuted late last year. They're already taking in over $350 million in assets under management. It looks a whole lot better when it comes to exposure, frankly, but there's just one big problem here. We'll talk about that in this next video where we look at why quantum computing investors are going to get burned badly, just like the back of my neck in this hot Osaka sun. Thanks for taking the time to watch this video today.