A Multi-Factor ETF Idea to Tap Low Volatility, Quality, Value | ETF Trends

The current market environment could be appropriate for the SPDR MSCI Quality Mix USA ETF (NYSEArca: QUS), an exchange traded fund with exposure to the low volatility, quality and value investment factors.

QUS tracks the equally-weighted MSCI USA Quality Mix A-Series Index, which is a combination of the MSCI USA Value Weighted, MSCI USA Minimum Volatility and MSCI USA Quality Indexes.

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.

“From a smart beta factor perspective, quality has led all year and is the best-performing factor over the past three and 12 months,” said State Street in a recent note. “This trend reinforces the late-cycle narrative, where investors are placing a higher emphasis on balance sheet sustainability and cash flow generation—two traits inherent within the quality factor.”

Right Time For A QUS Query

Among factor-based strategies, low or minimum volatility and quality are again proving popular with advisors and investors in 2019.

The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.

“Diving a bit deeper to see the interplay between factors, the higher preference for caution is reinforced,” said State Street. “Low beta, defensive, and growth exposures—where half of the stocks in the Russell 1000 Growth Index can be found within the quality factor index from MSCI, have outweighed the more cyclical components of the market. Even with more cyclical positioning as of late, high beta, dynamic, and small caps are all still underperforming on a one-year basis.”

Home to nearly $265 million in assets, QUS holds 620 stocks. QUS allocates 24.41% of its weight to technology stocks and nearly a quarter of its combined weight to the financial services and healthcare sectors.

“Growth is coming at a high price, given that growth stocks trade in the top decile relative to their 15-year history, based on price-to-earnings,” according to State Street. “Consider targeting inexpensive firms with sustainable cash flows and quality balance sheets to combat higher valuations while still positioning for growth.”

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