Now more than ever, ETF investors need to get exposed to the quality factor. One ETF that gives investors the necessary exposure to quality by capturing upside via companies that can mute the effects of a downturn is the iShares MSCI USA Quality Factor ETF (QUAL).
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. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents.
The index is based on a traditional market capitalization-weighted parent index, the MSCI USA Index. Getting this quality exposure also won’t come at a premium with QUAL’s low expense ratio of 0.15%.
Overall, QUAL gives investors:
- 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.
Under the Hood
What’s under the hood that gives QUAL its quality exposure? Looking at its top 10 holdings, it’s a nice mix of consumer discretionary, the seemingly invincible technology sector and healthcare–all sectors that have been able to perform well despite the pandemic.
As far as names go, a lot of familiar large cap techs like Apple and Facebook can be found. Additionally, those tech names are paired with recognizable consumer brands like Coca Cola and health care company United Health.
As mentioned earlier, the need for quality investments is even more apparent as noted in a Money Control article:
“In a year that threw up a volatile, uncertain, complex and ambiguous world, a factor-based stock-selection style focusing on value stocks available at discount compared to their intrinsic values, low volatile stocks with stable price movement will outperform over the longer term. Sustainable business with strong balance sheets, high profitability, low leverages and entry barriers tend to exhibit lower risk and better long-term performance. Quality-centric investment style would outperform in a subdued economic growth phase.”
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