A Factor ETF Right for the Times

Among investment factors accessible via exchange traded funds, low volatility is getting plenty of attention this year, but the quality factor is not far behind.

The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.

While the quality and value factors often appear together across various stocks and ETFs, that should not be interpreted to mean that all quality stocks and ETFs are discounted relative to the broader market.

Related: A Quality Alternative to Traditional S&P 500

For instance, the iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL) tracks large- and mid-sized U.S. stocks with high returns on equity, low debt-to-capital ratios and low variability in earnings growth over the previous five years relative to sector peers.

QUAL holdings typically hold up slightly better during market downturns. They don’t retreat as much as high growth stocks since their strong competitive advantages help shield profits and make the firms less sensitive to business cycles.