VIDEO: ETF of the Week – QUAL

Chuck Jaffe: One fund, on point for today, the expert to talk about it. Welcome to the ETF of the Week. Yes, it’s the ETF of the Week, where we get the latest take from Tom Lydon, vice chairman at VettaFi, where they have all the tools you need to be a smarter, savvier, more well-informed investor on exchange traded funds. It’s and on Twitter @Vetta_Fi. Tom Lydon, it’s great to chat with you again.

Tom Lydon: Great to be back. Thanks, Chuck.

Chuck Jaffe: Your ETF of the week is…

Tom Lydon: The iShares MSCI USA Quality Factor ETF, ticker symbol QUAL.

Talking Up QUAL

Chuck Jaffe: QUAL, the iShares MSCI USA Quality Factor ETF. So quality factor, now factor investing, it seems like it doesn’t take any factor. The market just keeps on going in spite of all the things that would make us think it’s got a turn here somewhere.

Tom Lydon: Well, you’re right, Chuck. Right now, for the average investor out there, it used to be their biggest concern six months ago was inflation. However, now the Fed seems to have things under control, or at least they’re heading in the right direction. So now the biggest fear for equity investors is actually pricing and market volatility.

Factor investing can come in many different ways. We can have value, which is an all-around price. We can have momentum, which in certain areas of the market tend to move well during different times, and managers that have momentum strategies will just jump into more of those stocks that are moving at that period of time.

In quality, it seems to be working pretty well this year. It’s not just good companies that are stable and are going to be around for an extended period of time, but many of them look growth-oriented as well.

So this ETF really focuses on quality, focuses on good companies. When you dive into some of the companies, if you read me these companies 10 years ago, I’d say, “Wow, that’s a pretty aggressive portfolio.” How are we sure it’s quality?

When you look at companies like Nvidia, Visa, Microsoft, Apple, and Meta, it used to be that these were the go-go growth companies. Now they’re now stables within our economic universe, in our market universe, and with many folks’ portfolios as well.

When you look at the performance year to date, it’s pretty good. But the thing is, there hasn’t been a lot of volatility.

Chuck Jaffe: And any sort of factor ETF, particularly one that looks at quality, is going to try to take some of the volatility out.

But I’m curious because when we talked about factors, you mentioned value first. One of the things I say all the time is when I talk to a value investor, you have to define it. Because value means different things to different people. It’s in the eye of the beholder.

This is not the only quality factor ETF out there; there’s a bunch of them. Do we have to define quality as well? Just like you have absolute and relative value, do we have absolute and relative quality?

Tom Lydon: You’re bringing up a very good point. Value today is not what it was 10 or 15 years ago. I think it’s the same with quality as well.

What’s happening is companies like Nvidia, Apple, and Metas are actually in these buckets. But if you look at their PE ratios, they look fairly expensive.

But baked into that enterprise value today, the way they look at the valuation of companies, it’s a little bit different. Because specifically, it used to be with companies that owned inventory, or they own land, or they own patents; those things you could actually see and feel.

Today there’s a lot of inherent goodwill that’s built up within the clientele that is factored into value. It’s factored into quality today. This is a sign of the times, where the modern innovation we’ve seen within the stock market gets credited in different ways today.

It’s crazy to think quality and value would fall into the bucket of companies like these big tech companies that we’re talking about right now.

Chuck Jaffe: Absolutely. The other thing about what this fund is it’s not a proxy for the S&P 500. But it does tend to be relatively correlated, and it’s been above its 200-day moving average since about March of this year. It flirted around the 200-day moving average at the beginning of part of this year when the market was struggling. So is this a 200-day moving average play, or is this a core holding?

Tom Lydon: Well, you’re touching on two things. First, it’s not just that it’s got some of the same companies. The weightings of those companies are much different than the S&P 500.

The top 10 companies in the S&P 500 account for almost 38% of the total capitalization there. So, pretty heavily weighted, not as heavily weighted here, No. 1.

No. 2, companies that you wouldn’t see in the top 10 in the S&P 500 make their way into the top 10 within QUAL. It’s a way to diversify. As you’re looking for that quality factor and a little more stability, it may be something to consider. Because that concentration risk we have at the S&P is something concerning today. Even though we’ve had a pretty good run with the S&P, it’s all been on the back of 10 stocks.

Chuck Jaffe: And where does the money for this come from when we’re talking about international or about emerging markets? It’s always about people having cash on the sidelines, etc.

While you may not have this portfolio, you’ve got a lot of these companies if you have some big domestic growth players.

Are you taking some money from your standard growth or value, saying, “I’ll make quality more of a factor literally and figuratively?” Or is the money coming from someplace else for the average person?

Tom Lydon: First, we know a lot of people still have money on the sidelines. So if you’re worried a little bit about risk, you’re worried about diversification. QUAL is something to think about.

The other thing is those who are invested have a very high correlation to the S&P 500. Even if you’ve got a bunch of different mutual funds and a bunch of different ETFs, if you throw that into a consolidated group, you’ll likely find there’s a high correlation.

So there’s an opportunity to take some of the S&P 500-like allocation and move it into QUAL, where you might be a little bit more diversified; makes sense.

Chuck Jaffe: It’s QUAL, the iShares MSCI USA Quality Factor ETF, the ETF of the week from Tom Lydon at VettaFi. Tom, great stuff. Talk to you again next week.

Tom Lydon: Thanks, Chuck. Talk to you soon.

Chuck Jaffe: The ETF of the Week is a joint production between VettaFi and Money Life with Chuck Jaffe. And yeah, that’s me. If you want to learn about my hour-long weekday podcast, go to or search for it wherever you find good podcasts.

And speaking of good podcasts, this one is brought to you by VettaFi, which you can search for online at to use their tools. They’re on Twitter @Vetta_Fi, and Tom Lydon, their vice chairman, and my guest, he’s on Twitter too, @TomLydon.

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