Quality Factor Has Been a Steady Outperformer in Smart Beta

Can momentum and growth sustain its pace in the extended bull market or is a flight to value-oriented equities the move to make? Smart beta investors have various avenues to take, but one steady outperformer has been quality.

“Despite the fact that the S&P 500 returned 30% in 2019, there was just one smart beta investing theme that topped the broader market,” wrote David Dierking in The Street. “The focus on quality stocks, those that are backed by healthy balance sheets, strong cash flows and manageable debt loads, has gained investors’ favor as they pivot to a more defensive positioning.”

Click here to watch Dierking’s video on quality outperformance.

One ETF option to consider is the cost-effective iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL) with a paltry expense ratio of just 0.15%. QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks with quality characteristics as identified through certain fundamental metrics.

Fund facts:

• Exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage)
• Index-based access to a specific factor which has historically driven a significant part of companies’ risk and return

• Use to help manage exposure and risk within a stock allocation

Other quality-focused funds to look at:

1. JPMorgan U.S. Quality Factor ETF (NYSEArca: JQUA): seeks investment results that closely correspond to the performance of the JP Morgan US Quality Factor Index. The fund will invest at least 80% of its assets in securities included in the underlying index. “Assets” means net assets, plus the amount of borrowing for investment purposes. The underlying index is comprised of U.S. equity securities selected to represent quality factor characteristics.
2. Invesco S&P 500 Quality ETF (NYSEArca: SPHQ): seeks to track the investment results of the S&P 500 Quality Index. In selecting constituent securities for the underlying index, the index provider calculates the quality score of each security in the S&P 500 Index, then selects the 100 stocks with the highest quality score for inclusion in the underlying index.
3. WisdomTree U.S. SmallCap Quality Dividend Growth Fund (NasdaqGM: DGRS): seeks to track the price and yield performance of the WisdomTree U.S. SmallCap Quality Dividend Growth Index. The index is a fundamentally weighted index that consists of the small-capitalization segment of dividend-paying U.S. common stocks with growth characteristics.

For more market trends, visit ETF Trends.