In the world of investing, there is a lot of confusion among individuals as to what the difference between what quality and value typically means. According to one analyst, many people mistakenly believe they are essentially the same thing, or at at least very close in definition, making them essentially interchangeable with regard to evaluating equities.

“Off Wall Street people might think quality and value have very similar meaning. Not really here. In fact there is something close to opposites right now. Quality stocks have been holding up this stock market. There is an ETF, QUAL, that essentially does follow a strategy of buying high quality companies. What does that mean? High return on equity, low debt, very stable earnings. Very familiar names in here,” Mike Santoli said on CNBC Monday.

QUAL holds a number of familiar names such as Johnson and Johnson, Apple, Mastercard, 3M, Visa, Facebook, Pepsico Inc., Exxon Mobile Corp., and Walt Disney, which Santoli explains, while not always the least expensive stocks to buy, are proven performers, making them indeed quality companies.

The iShares Edge MSCI USA Quality Factor ETF (QUAL) seeks to track the investment results of an index that measures the performance of U.S. large- and mid-capitalization stocks as identified through three fundamental variables: return on equity, earnings variability and debt-to-equity.

The fund provides exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage)

“Essentially finding the cheapest stuff in the market has been a really poor strategy relative to buying expensive but high quality stuff. It’s kind of a get what you pay for type model. It’s not always that way, but this cycle it’s happening that way. Part of it is because of the cyclical uncertainties, the global growth questions right now,” Santoli added.

The CNBC analyst suggests that for investors who believe the Fed is likely to cut rates, as many economists are anticipating, RPV, a value ETF might be a good buy.

“If you want to play mean reversion and you think that the Fed rate cut is going to bring cyclical high qualities back into the fore, RPV probably is dry powder in that regard,” Santoli explained.

The Invesco S&P 500® Pure Value ETF (RPV) offers a way for investors to access large cap U.S. equities that are classified as value stocks, generally maintaining low pricing multiples and higher dividend yields. RPV may seem similar to the more popular and liquid S&P 500 Value Index Fund (IVE), but the methodologies used are actually quite different. RPV maintains a “pure value” focus, holding a relatively small number of firms that demonstrate the most significant value characteristics, while IVE uses a more liberal definition of value stocks and includes several securities that are also found in the growth counterpart. RPV is slightly more expensive, but is a more targeted choice for those investors who are seeking to focus explicitly on value companies. Not surprisingly, RPV exhibits a bias towards certain sector of the U.S. economy, generally tilting exposure towards financial companies and energy firms.

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