Once again, the quality factor is ranking as a leading investment factor, highlighting opportunity with a plethora of ETFs, including the FlexShares US Quality Large Cap Index Fund (CBOE: QLC).
QLC selects and weights companies based on management efficiency, profitability, and cash flow to determine quality, according to FlexShares. Management efficiency is a quantitative evaluation of a firm’s deployment of capital and its financing decision. Profitability scores help weed out firms with wider margins, which may be better positioned to grow. Lastly, cash flow signals the liquidity level of a company. Those with higher cash flows may be better situated to take advantage of potential opportunities or enjoy a financial cushion in downturns.
Historical data confirm that the quality factor wins over the long-term as the most profitable companies have easily outpaced their less profitable peers by significant margins over longer holding periods. SPHQ’s benefits are on display this year.
Home to 147 stocks, QLC extols quality by allocating nearly 42% of its weight to the technology and healthcare sectors. Conversely, lower quality groups such as energy, materials, and real estate combine for barely more than 8% of the fund’s roster.
With the economy and equity markets still beholden to the coronavirus, the quality factor and QLV could take on added importance in the waning stages of 2020.
As more analysts are calling for a shift to quality or companies with healthy balance sheets and strong cash flow, ETF investors can also focus on this segment of the markets for a more defensive portfolio tilt.
Additionally, QLC has a dividend yield of 1.55% on a trailing 12-month basis, implying ample room for payout growth among its components. Dividends are often viewed as a quality trait, but investors looking for credible combinations of dividends and the quality should assess factors beyond pure yield. Those factors include return on equity (ROE) and a company’s ability to sustain and grow payouts.
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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.