The quality factor is calculated from a company’s leverage and profitability and identifies stocks that are characterized by low debt, stable earnings growth, and other “quality” metrics, with the expectation that these will provide the possibility of excess returns.
“Overall, the quality factor captures detailed information about companies and aims to enhance investor returns by tilting portfolios towards stocks that rank well from both a profitability and leverage standpoint,” the ETF Strategists said. “Funds like QARP seek out companies that earn more dollars of net income per dollar of assets, squeeze more sales from their assets this year than last, report high quality earnings, and use relatively less leverage.”
Related: ETF Trends Smart Beta Channel
The value factor is based on a company’s valuation ratios and identifies stocks that have low prices relative to their fundamental value and that provide the possibility of excess returns.
“So, for example, comparing the price of a stock to its cash flow per share will give a sense of the relative valuation that the market is putting on that cash flow, and the same is true of earnings, sales, or the book value of equity, to name a few often seen versions,” according to DWS.
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