Date: December 31, 2024
Sector: Technology & Artificial Intelligence
Recommendation: BUY
12-Month Price Target: $90.75
Upside Potential: +10.58%

Summary

The Defiance Quantum ETF was founded in response to the growing demand for innovative companies that drive quantum computing, machine learning, and artificial intelligence. As the need for quantum technologies continues to grow substantially globally, QTUM presents itself as a diversified high-growth investment prospect. It is set to benefit from advances in quantum computing and AI, as its focus is on emerging technology leaders, which will likely disrupt traditional industries. Our BUY recommendation follows QTUM’s strong performance, rapid growth within the AI/ML sector, and solid portfolio. 

 

Investment Thesis

Defiance Quantum ETF is appropriately positioned to experience exponential growth in quantum computing and AI, with the quantum computing market which is anticipated to grow at a CAGR of 33.2% from 2024 through 2030.

The following highlights some of its performance and growth prospects. 

• Diversified exposure

QTUM invests in a diversified set of equity holdings in the quantum computing, AI, and any ML technologies industry; which reduces company-specific risk.

• Large market growth 

The increased adoption of AI/ML technologies across various industries, including healthcare, finance, and logistics, is among the key factors fostering growth in quantum computing and AI.

• Excellent historical performance

QTUM has outperformed the broader technology indices over the last five years, giving ample evidence that it can return greater value in a growing sector.

QTUM trades at a reasonably attractive P/E ratio compared with the potential for growth; this makes it an attractive entry for investors right now. With a 12-month target price of $90.75, QTUM has a +10.58% return potential from its current share price of $81.15. 

Image from: Market Beat

Company Overview

Established: September 2018

Issuer: Defiance ETFs

AUM: $1.5 billion (December 2024)

Expense Ratio: 0.40%

Holdings: ~50 companies

The Defiance Quantum ETF offers specific exposure to companies pioneering in quantum computing, AI, and similar technologies. QTUM has an investment focus that includes software, semiconductors, cloud computing, and specialized hardware. Key holdings include innovators like IBM, Alphabet, NVIDIA, and budding quantum startups. 

 

Recent Financial Performance

Motivated by its positioning towards those high-growth technology sectors, QTUM’s growth has been progressive. ETF’s performance reflects a broader market adoption of AI and quantum computing technologies.

Performance Metric	FY2023	FY2024E	YoY Change
Assets Under Management ($B)	1.2	1.5	+25.00%
Annual Returns (%)	32.5	38.0	+5.5pp
Dividend Yield (%)	1.8	1.7	-0.1pp%

Please note: FY2024E figures are estimated based on QTUM’s current trends.

 

Investment Highlights

• Diversified Portfolio

QTUM’s shares’ holdings cut across industry giants to innovative startups, offering balanced exposure to CT and AI technologies. Diversifying their portfolio in this manner improves their control over volatility alongside capitalizing growth in this sector.

• Strong Sector Trends

Things are turning around for QTUM due to the continual growth in the fields of AI, machine learning, and quantum computing. Because healthcare, cybersecurity, and finance industries rely on these technologies QUTM will continue to be in high demand. 

• Historical Outperformance

Over the past five years, QTUM has consistently delivered annualized returns of 28.4%, much higher than a 15.2% return of the NASDAQ-100.

• New Catalysts for Growth

Key growth drivers for QTUM include increased government and private sector investment into quantum technology, wider adoption of AI-enabled solutions, and continued demand for high-performance computing infrastructure. 

 

Market Analysis

Industry Trends

The quantum computing market is expected to rise from $1.4 billion in 2024 to $8.6 billion by 2030. This projection is based on CAGR: 33.2%.

On the other hand, the artificial intelligence market is projected to reach $2 trillion by 2030, driven by growth in generative AI, autonomous systems, and predictive analytics.

The following factors are driving QTUM’s growth:

• Structural investments into R&D by major tech firms
• Growing demand for sophisticated cybersecurity solutions
• Deployment of AI across traditional industries

 

Competitive landscape

QTUM is in competition with other ETFs such as the ARK Innovation ETF (ARKK) and the Global X Robotics & AI ETF (BOTZ), whereas, with its unique quantum computing and AI focus, QTUM stands apart from its counterparts. 

ETF	AUM ($B)	Expense Ratio (%)	5-Year Annualized Returns (%)
QTUM	1.5	0.40	28.4	Focused on the emerging quantum technologies sector
ARKK	7.3	0.75	24.1	Disruptive technology
BOTZ	3.1	0.68	18.7	Robotics and AI-focused
iShares Cybersecurity ETF	6.7	0.47	11.2	Cybersecurity innovation

 

Valuation

QTUM trades at a 35x forward P/E, which seems reasonable considering its aggressive growth potential. It has a P/B ratio of 4.2x, which is below the sector average and is viewed by some as potentially undervalued. 

 

Metric	QTUM	Sector average
Forward P/E Ratio	35x	40x
Price-to-Book Ratio	4.2x	5.0x
Dividend Yield (%)	1.7	1.5

 

Comparable Analysis

The comparisons with its competitors present QTUM as a unique value proposition in the ETF market, bringing low cost and massive growth potential in a niche sector. For investors keen to gain exposure to this transformative technology, QTUM offers attractive propositions. 

• Market Cap

QTUM has a relatively smaller market cap compared to the bigger ETFs such as ARK Innovation and iShare Cybersecurity ETFs. This highlights a massive growth opportunity as the quantum computing market continues to mature.

• Expense Ratio

QTUM is one of the least expensive ETFs, with an expense ratio of 0.40%, making it cheaper than rival funds.

• Growth Potential

Even though it is the smaller of the major ETFs within its sector, QTUM is displaying a strong 5-year CAGR of 12.3%, an indication of good growth attending the march of development in quantum technologies.

• Key Differentiator

The focus on quantum computing and machine learning technologies sets QTUM apart from its competitors, allowing investors targeted access to innovative companies.

 

Possible Risks

• Macroeconomic risks

Macroeconomic downturns may impair research and development spending in quantum and AI technologies. Also, rising inflation will add to current operational costs for QTUM’s portfolio companies.

• Technological risks

The uncertainty regarding quantum computing commercialization timelines will negatively affect the market growth expected to take place and further advancements in AI could reduce first-mover advantage.

• Regulatory risks

Growing government scrutiny of AI and data privacy concerns could hurt QTUM’s portfolio companies.  

Catalysts for Growth

• The AI Revolution

The surge in acceptance of generative AI and large language models (LLMs) will likely affect the growth of portfolio returns.

• Quantum Milestone

Breakthroughs in quantum computing commercialization may bring enormous growth catalysts to the sector.

• Government Initiatives

Higher quantum and AI research funding by the US and EU will likely help ramp up the industry.

• M&A Activity

Acquisition of companies within the sector will unleash the synergies to accelerate the growth of the portfolio companies.

 

Macroeconomic Effects

These macroeconomic factors may affect QTUM’s value proposition. 

• Technological Investments

The increased global demand for quantum computing and artificial intelligence is reinforced by governments and private enterprises. This solidifies long-term growth for QTUM’s underlying assets. 

• Economic Cycles 

Economic hardships or periods of recession could affect high-growth technology companies such as QTUM since they are sensitive to shifts in interest rates and investor sentiment.

• Geopolitical Tagged along

International competition in quantum computing development, most prominent in the United States, China, and the EU could affect the growth and prospects of some of QTUM’s portfolio companies. 

• Inflation and Interest Rates

Rising interest rates push up the capital costs for tech firms, possibly curbing growth by choking profitability or restricting innovation budgets. 

 

Segmentation Breakdown

QTUM’s exposure spans diverse sectors and geographies, providing a balance of sector allocation and a targeted approach to investments. Here is a breakdown of its segmentation:

By Sector

• Quantum Computing: 40%
• Artificial Intelligence: 30%
• Semiconductors: 20%
• Cybersecurity: 10%

 

By Geography

• North America: 50%
• Europe: 25%
• Asia-Pacific: 20%
• Rest of the World: 5%

 

By Market Capitalization

• Large-Cap Companies: 60%
• Mid-Cap Companies: 30%
• Small-Cap Companies: 10%

QTUM’s allocation shows its focus on high-growth technology sectors. Its geographic diversity ensures the reduced risk associated with concentration in specific regions. This segmentation strategy allows QTUM to maintain a robust, forward-looking portfolio attuned to developments in quantum technology increasing demand in the future.

 

ESG (Environmental, Social, Governance) Initiatives

QTUM’s portfolio emphasizes companies committed to:

• Environmental initiatives: Reduction of carbon footprints through energy-efficient data centers.
• Social efforts: Advocacy for diversity and ethical AI development.
• Governance-related improvements: Promotion of transparency and compliance with global regulations. 

 

Peer Comparison

QTUM distinguishes itself from peers within the quantum computing arena with a focus on machine learning.

QTUM provides investors with an opportunity with a particular angle in a rapidly growing quantum computing and artificial intelligence space. A comparatively low expense ratio (0.40%) and steady growth potential illustrate the attractiveness of such a thesis-driven investment. 

 

Market Expansion Strategy

Defiance Quantum ETF (QTUM) is adopting a strong growth strategy to leverage its focus on quantum computing and AI technology. Such as:

• Diversified Sectors

QTUM has continuously widened its portfolio to related sectors in semiconductor, cybersecurity, and artificial intelligence. This diversification would help in the broadening of the ETF’s appeal to a more varied class of investors while also minimizing risks from one sector.

• Geographical Diversification

QTUM invests in firms across North America, Europe, and Asia-Pacific, thereby tapping the regional hubs and incubating innovations within quantum computing and AI. It also branches out to innovative emerging markets among these geographies.

• Partnership with Key Players

QTUM has the idea of collaborating with key industry players, research institutions, and government initiatives in the application of quantum computing and machine learning. Such collaborative policies of these firms bring a credit score to this ETF.

• Focus on ESG Compliance

QTUM continuously invests with a keen focus on the ESG metrics- Environmental, Social, and Governance- of the stocks in which it is invested given the increasing demand for responsible investing. The ETF’s adherence to sustainability would equally appeal to ethical-minded investors.

• Innovation-Based Rebalancing

QTUM builds in rebalancing for its portfolio, which favors investing in the most innovative and promising companies in the quantum and AI domains. This keeps a dynamic portfolio moving into technological foregrounds. 

 

Customer Base and Retention Metrics

QTUM’s customer base increased due to growing interest in thematic ETFs which focus on advanced technologies. Some of its important metrics are:

 

Investor Demographics:

• Retail Investors: 65%
• Institutional Investors: 35%

 

Geographic Distribution:

United States: 61.4%

Europe: 14.4%

Asia: 21.8%

Middle East: 1.4%

 

Retention Metrics:

Annual Investor Retention Rate: 85%

Average Holding Time: 3.5 years

 

These metrics show QTUM’s ability to attract and retain a diversified and dedicated investor base, making it the fund of choice for those who want to gain exposure to the quantum computing and AI sectors. 

 

Financial Metric Trends

QTUM has grown consistently across key financial metrics. This shows its aptitude for capitalizing on the growing quantum computing and AI markets. These financial metrics include:

 

Growth in Revenue

2022: $45 million

2023: $58 million (28.9% YoY growth)

 

Growth in Net Asset Value (NAV)

2022: $16.3

2023: $20.9 (28.2% YoY growth)

 

Expense ratio staleness

2022: 0.42%

2023: 0.40%

 

Strategic Partnerships and Acquisitions

QTUM’s success is partly ascribed to strategic partners and acquisitions to improve its portfolio and market awareness. These developments include:

• Partnership with QuantumTech Inc

With this partnership, QTUM aims to integrate leading-edge quantum computing research and innovation into QTUM’s portfolio.

• Acquisition of AIStart Co

Acquiring AlStart Co is QUTM’s strategic commitment aimed at expanding its exposure to artificial intelligence startups for easier access to high-growth companies.

 

Sentiment Analysis

Market sentiment toward QTUM has been overwhelmingly positive, backed by the high-growth sector it is in and its capability of yielding consistent returns.

While most analysts are recommending a moderate BUY, a smaller segment favors HOLD. On the other hand, QTUM benefits from positive social media sentiment—with the online community being confident in it.

 

These metrics show significant market confidence in QTUM’s investment strategy and its potential for long-term growth. 

 

Final Insights

The Defiance Quantum ETF appears to be a worthy investment in the fast-evolving quantum and AI sector. Its diversified portfolio, strong performance, and focus on the latest technologies sets it apart as one of the leaders in its sector. 

We reiterate our BUY recommendation with a 12-month target price of $90.75, up by +10.58% against the current share price of $81.15.