Following a volatile 2018 for equities, some investors are looking for ways to remain engaged with stocks while mitigating portfolio risk. The quality factor can help with that objective and several exchange traded funds. The iShares Edge MSCI USA Quality Factor ETF (Cboe: QUAL) is one ETF focusing on quality.
QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks exhibiting quality characteristics as identified through racks U.S. large- and mid-capitalization stocks based on quality screens for three fundamental variables: return on equity, earnings variability and debt-to-equity.
“We advocate targeted risk-taking in assets where the risk/reward looks most appealing,” said BlackRock in a recent note. “We still prefer equities over bonds, although with reduced conviction amid rising risks. This underpins our preference for quality companies with free cash flow, sustainable growth and clean balance sheets.”
Confer With Quality
The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. 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.
The $7.07 billion QUAL is home to 125 stocks and has a standard deviation of 9.20%, which is inline or slightly below some broader domestic equity benchmarks.