A New Value ETF With a Quality Emphasis

Over 100 exchange traded funds have come to market in the U.S. this year. An interesting name among smart beta equity strategies is the Xtrackers Russell 1000 US QARP ETF (NYSEArca: QARP), which is two months old.

The smart beta ETF 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.

QARP tracks the Russell 1000 2Qual/Val 5% Capped Factor Index, which is comprised of large-cap equity names selected based on quality and value factors.

“QARP’s index selects stocks based on the strength of their quality and value characteristics. In this case, quality is a composite of profitability (as measured by return on assets, asset turnover, and accruals) and leverage (operating cash flow divided by total debt). Value is a mashup of cash flow yield, earnings yield, and sales/price,” according to Morningstar.

Solid Start for QARP

QARP holds nearly 390 stocks. 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.