The Importance of the Quality Factor

Among individual investment factors, growth and value receive the most attention, but the current market environment could be conducive to embracing the quality factor, which is accessible via an array of exchange traded funds.

For example, 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.

With the current bull market in U.S. equities and the business cycle aging, the time could be appropriate for investors to consider factor strategies beyond growth and value.

“It is no secret that the Value factor typically does well post-recession when the economy is recovering, while Growth tends to perform well during the expansion phase,” said BlackRock in a note. “However, should the economy as well as investment styles really be defined as binary? Or should investors consider investment styles beyond Value and Growth to express views in market environments beyond just recoveries and expansions?”

A Protective Strategy

Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the October market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.

Related – Smart Beta Investing: Making a Call on Quality