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.
[related_stories]QUAL’s “key strength is that it invests in large-to-mid-cap US stocks that have generated high return on equity, carry low variability in earnings growth and have a low-debt-to-equity ratio relative to their peers over a five-year period. These qualities are usually associated with companies who have one of the leading positions in their respective sectors,” according to a Seeking Alpha analysis of the ETF.
Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar. However, as the bull matures, investors often exhibit a preference for higher quality fare with more compelling valuations.
Related: 3 High Octane Value Trades for a Bear Market
“QUAL really is about investing in a number of high quality stocks from different sectors, rather than an individual company or a single sector. In a tough business environment marked by declining earnings and geopolitical tensions which could get worse, QUAL could prove to be a promising pick,” adds Seeking Alpha.
For more information on Equity ETFs, visit our Equities category.
iShares MSCI USA Quality Factor ETF
