What Can a Multi-Factor Screening Methodology Do for Your Core Equity Exposure?

Large-cap stocks comprise the cores of many investors’ portfolios’ equity allocations. While large-cap stocks have historically been consistent drivers of performance, the returns of many large-cap equity funds may track closely to the performance of the broader large-cap market.

Research from FlexShares has found that applying investing factors when building a large-cap stock portfolio may deliver superior risk-adjusted returns compared to the broad large-cap market. Factors such as value, quality, and momentum are designed to target specific drivers of return, according to the firm.

The value factor prioritizes companies with attractive valuations relative to its market value based on metrics such as price to earnings (P/E) and price to book, according to FlexShares. 

The quality factor is based on the desire to invest in companies with a financial underpinning that is solid enough to maintain or grow over time, according to FlexShares.

The momentum factor reflects the belief that stocks with strong recent performance continue to maintain that performance for some time in the future. Momentum focuses on technical metrics such as a rising share price over a particular length of time or an increase in trading volume to measure market sentiment for a particular company, according to FlexShares.

The FlexShares US Quality Large Cap Index Fund (QLC) is designed to offer the potential benefits of exposure to the quality, value, and momentum factors while targeting the same general risk profile of the overall large-cap space. QLC tracks the Northern Trust Quality Large Cap Index, an index comprising large-cap U.S. companies that scores companies based on quality metrics like profitability, management efficiency, and cash flow. The methodology weeds out the lowest-scoring companies, according to VettaFi.

Top holdings as of June 2 include familiar blue-chip companies such as Apple Inc. (AAPL, 7.59%), Microsoft Corp. (MSFT, 4.26%), Alphabet Inc. (GOOGL, 2.92%), Alphabet Inc. (GOOG, 2.75%), Johnson & Johnson (JNJ, 2.34%), Berkshire Hathaway (BERK.B, 2.16%), Amazon.com Inc. (AMZN, 1.78%), and Procter & Gamble Co. (PG, 1.61%), according to the fund’s website.

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