An Appropriate Time to Make a Quality Query

By Todd Shriber via

Of the five major investment factors – low volatility, momentum, quality, size and value – quality is perhaps the most overlooked. One reason for quality’s overlooked status could be the multiple ways in which investors define the factor. No other factor creates a variety of definitions and opinions on par with quality.

“It’s likely the factor where opinions are most diverse regarding the definition,” according to Factor Research. “Broadly speaking there are qualitative and quantitative evaluations and these are often combined in a scoring model. Criteria like management quality or the soundness of strategy are intuitively appealing, but difficult to verify given a lack of data.”

At the index level, various benchmarks that isolate the quality factor go about that endeavor in varying fashion. For example, the JP Morgan US Quality Factor Index starts with the Russell 1000 universe, whittling that space down based on quality and profitability characteristics while targeting high-quality equities and minimizing stock-specific risk.

Conversely, the MSCI USA Sector Neutral Quality Index takes into employs return on equity (ROE), low leverage and low earnings variability in its weighting methodology. More variables or increased complexity in application of the quality factor do not always leader to superior results. Since December 2017, its first full month of trading, the JPMorgan U.S. Quality Factor ETF (JQUA), which tracks the JP Morgan US Quality Factor Index, is beating the MSCI USA Sector Neutral Quality Index by more than 300 basis points.

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