A quality ETF may be a good fit for investors worried about the cyclicality and unstable returns of certain sectors.
The ALPS O’Shares U.S. Quality Dividend ETF (OUSA) offers exposure to quality U.S. equities by investing in companies that have sustainable dividends, a high return on assets, and low levels of debt.
Furthermore, the fund screens its holdings for profitability, low volatility, dividend growth, and low leverage to help manage through market drawdowns.
“Given the market volatility that is likely to persist heading into the end of the year, high-quality dividend-yielding stocks are likely to be in focus. Rather than shifting away from equities, advisors might find a more risk-conscious approach rewarding,” said Todd Rosenbluth, head of research at VettaFi.
How Quality ETF ‘OUSA’ Compares to Benchmarks
A key difference between OUSA and large-cap benchmarks is the fund’s exclusion of the energy and materials sectors due to their cyclicality and unstable returns.
Q3 earnings appeared to show broad rises in earnings per share (EPS). However, lower-quality cyclical sectors, including energy and materials, are reporting year-over-year declines in EPS with punishing share price declines not seen since 2017 on earnings misses, according to SS&C ALPS Advisors.
This is important, as earnings growth is a key factor of expected future returns, according to ALPS. OUSA’s 12-month estimated EPS growth of 6.83% as of the end of October outpaces the S&P 500’s estimated EPS growth of 5.12%. The ETF’s higher estimated EPS growth is a result of its quality-focused methodology.
According to ALPS, following a bottom in relative underperformance against broader markets, quality stocks historically outperform the S&P 500 by an average of 174 basis points on a one-year forward basis with roughly 70 bps of annualized outperformance over the past two decades.
OUSA has a trailing 12-month price/earnings ratio of 18x, while the S&P 500’s P/E ratio is 20.6x as of the end of October. The fund’s lower P/E ratio underscores means investors in the fund are accessing a high-quality portfolio at a lower valuation than the S&P 500.
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