The virtues of the quality factor aren’t confined to domestic equities and the iShares Edge MSCI Intl Quality Factor ETF (IQLT) is a prime example of that. IQLT screens stocks within its developed markets mandate using quality measures such as return on equity, earnings variability and debt to equity.
The quality factor is a point of emphasis for a growing number of strategic beta ETFs. 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.
“Investing in the quality factor offers above-average exposure to these highly profitable companies with stable earnings and low indebtedness,” said BlackRock in a recent note. “The quality factor has also historically been more resilient in challenging market environments while still providing much-needed upside market participation. Given prospects for a slowing or weakening global economy, the quality factor may be an attractive investment strategy for deploying capital in international markets.”
Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the fourth quarter of last year’s market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.
“The iShares Edge MSCI Intl Quality Factor ETF (Ticker: IQLT) is one quality strategy that provides investors with diversified, efficient access to international markets,” notes BlackRock. “The strategy seeks to track the MSCI World ex USA Sector Neutral Quality Index, which selects companies with a high return on equity (ROE), low leverage, and low earnings variability while still providing diversification across sectors and countries.”
The $1.26 billion IQLT follows the MSCI World ex USA Sector Neutral Quality Index and holds 301 stocks. The U.K., Japan, and Switzerland combine for over 44% of the fund’s geographic weight. Data confirm there are good reasons to embrace international quality.
“We observe that international quality has historically outperformed the broader market over time in the chart below,” notes BlackRock. “In fact, international quality has outperformed the broader market by an annualized return of 1.9% with similar risk, providing investors not only with enhanced returns but also with attractive risk-adjusted returns.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.