However, FTSE employs a practical application of the quality factor with a focus on return on assets (ROA) and change in asset turnover (ATO).
“We find that historically companies with high current levels of ROA and larger changes in ATO have displayed superior subsequent operating performance. Historically, quality companies identified using these measures have outperformed those with lower levels of ROA and smaller changes in ATO. Highly profitable companies that display improvements in operating efficiency also exhibit lower levels of volatility and systematic risk,” said FTSE in a white paper on the quality factor.
The quality factor has become an increasingly popular point of emphasis for index providers and ETF sponsors. There are close to 25 ETFs emphasizing the quality factor currently trading in the U.S. [Quality ETFs on the Rise]
Over 100 U.S.-listed ETFs track FTSE indices. In addition to VWO, that group includes the iShares China Large-Cap ETF (NYSEArca: FXI), the Schwab Emerging Markets Equity ETF (NYSEArca: SCHE) and the Schwab International Small-Cap Equity ETF (NYSEArca: SCHC), among others.
ETF Trends editorial team contributed to this post.