“Smart beta indexes are an exciting and innovative area of the market and, as illustrated in our newest smart beta index measuring US large cap stocks exhibiting strong relative quality and value characteristics, can be an effective way to track a certain area of the market. Our research has shown that, over time, a smart combination of quality and value factors can tap into the best of both,” Tom Goodwin, senior index research director for FTSE Russell, said in a note.
Behind the Scenes of QARP
The smart beta QARP tries to identify companies that have strong quality scores relative to their peers while also looking at the value scores of the securities to avoid companies that are potentially over-priced. The quality focus also seeks to avoid so-called value traps, or companies with favorable valuation metrics as they approach bankruptcy, that a pure value exposure would likely fall into.
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.
Related: Investing in the New Volatility Regime
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.
“At DWS, we believe that multi-factor investing can be a valuable strategy for investors, and we are delighted to continue our collaboration with FTSE Russell to introduce an intuitive multi-factor approach that effectively views the market through the lens of an active manager. Investors seeking stocks with strong Quality metrics—high returns on assets, low accruals, increasing asset efficiency, low leverage—might also prefer such companies at lower valuations, hence QARP – Quality at a Reasonable Price,” Rob Bush, ETF strategist for DWS, said in a note.
For more information on alternative index-based funds, visit our smart beta category.