The quality factor may be hard to define for some, but there is no question regarding its usage by index providers and issuers of exchange traded funds.
ETFs using the quality factor as a cornerstone of stock selection and weighting methodology are growing in number. “According to ETF research firm XTF Inc., 23 equity ETFs track indexes of quality stocks, in both developed and emerging markets. The indexes measure quality with metrics including dividends, earnings growth, return on equity, cash flow and leverage, or the ratio of debt to equity,” reports Ari Weinberg for the Wall Street Journal.
As Weinberg notes, one of the more recognizable ETFs backed by the quality factor is the iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL). QUAL, which is just 13 months old, has raced to nearly $437 million in assets under management, making it one of the most successful ETFs to debut last year. [Some New ETFs off to Fine Starts]
QUAL tracks the MSCI USA Quality Index. That index emphasizes return on equity, earnings variability and debt-to-equity in the selection of large- and mid-cap U.S. stocks, according to iShares. Four of the QUAL’s top-five holdings are Dow components with Apple (NasdaqGS: AAPL) the outlier. The other four are Microsoft (NasdaqGS: MSFT), Johnson & Johnson (NYSEL JNJ), IBM (NYSE: IBM) and Exxon Mobil (NYSE: XOM).
QUAL has viable competitors when it comes to domestically-focused quality ETFs, including the FlexShares Quality Dividend Index Fund (NYSEArca: QDF). QDF is part of a three-ETF suite of dividend funds launched by FlexShares in 2012 that all focus on quality in some respect.