Big technology names have been aligning themselves with value and stability, especially during the pandemic, but investors should look at the big picture and focus on quality.
It’s easy to get drawn by the allure of big tech stocks like the Apples, Amazons, and Microsofts of the sector. While they certainly have a place in an investor’s portfolio, investors also shouldn’t overlook equities that exhibit high quality characteristics.
“The single biggest mistake I’ve seen investors make is to get stuck on trading around tech stocks rather than investing in high-quality stocks,” said Mark Mahaney, Evercore ISI’s senior managing director and head of internet research, who wrote “Nothing But Net: 10 Timeless Stock-Picking Lessons From One of Wall Street’s Top Tech Analysts.”
One of Mahaney’s investing tenets is looking at companies that exhibit DHQ, which is a self-developed acronym for “dislocated high-quality.”
“Companies facing large TAMs [total adjustment markets] that show relentless and successful, hopefully, product innovation, compelling customer value props, and great management teams,” explained Mahaney.
One Fund That Focuses on Quality
One exchange traded fund that addresses quality while also limiting volatility (something imperative in today’s market landscape) is the FlexShares US Quality Low Volatility Index Fund (QLV). With a 0.22% net expense ratio, the added low volatility feature doesn’t come at a high cost.
QLV tracks a proprietary index of U.S. companies that aims for a portfolio bias toward quality and reduced volatility. The index methodology first assesses financial strength and stability based on quality metrics like profitability, management efficiency, and cash flow. The lowest-scoring companies are excluded.
QLV seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Low Volatility Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to the Northern Trust 1250 Index, a float-adjusted market capitalization-weighted index of U.S.-domiciled large- and mid-capitalization companies.
“The FlexShares US Quality Low Volatility Index Fund (QLV) is designed to provide exposure to US-based companies that possess lower overall absolute volatility and that also exhibit financial strength and stability, which we believe are quality characteristics,” a FlexShares Fund Focus said.
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