“The QM index is broadly diversified, owning stocks with opposing characteristics,” Lee said. “Value stocks tend to be dogs, while quality stocks are darlings, so mixing the two produces market-like portfolios that don’t seem to deviate much from the index.” [Qualifying Emerging Markets Quality]
The indexing methodology essentially cuts out less fundamentally sound stocks that typically outperform during bull markets but perform horribly during bearish conditions. Consequently, lower quality stocks usually don’t recover in a bull market.
“In back-tests the QM index tends to slightly lag during bull markets and greatly outperform during bear markets,” Lee added.
For more information on ETF strategies, visit our indexing category.
Max Chen contributed to this article.