With market uncertainty always around the corner, it’s important to pad portfolios with quality investments. ETF investors can get exposure to quality and value by casting a wide net in the vast pool known as the Russell 1000 with the Xtrackers Russell 1000 US QARP ETF (QARP).
QARP seeks investment results that correspond generally to the performance, before fees and expenses, of the Russell 1000 2Qual/Val 5% Capped Factor Index (the “underlying index”). The fund will invest at least 80% of its total assets (but typically far more) in component securities of the underlying index.
The underlying index is designed to track the equity market performance of companies in the United States selected on the investment style criteria (“factors”) of quality and value. For ETF investors looking for a cost-effective play, the fund has a low 0.19% expense ratio in a market where smart beta funds can usually come with a hefty price tag.
Whether you can attribute the fund’s recent strength to the vaccine rally or the rotation from growth to value, the QARP is up about 17% for the year. With more investors looking to pounce on value investments ahead of the new year, the ETF could have more room to run.
Why the Quality and Value Factors?
Getting factors like quality and value sound good, but what exactly do the factors do to help pad portfolios? By seeking high-quality investments, ETF investors can simultaneously capture upside while limiting downside risk.
“The quality factor refers to the tendency of high-quality stocks with typically more stable earnings, stronger balance sheets and higher margins to outperform low-quality stocks, over a long time horizon,” a Risk.net article explained. “The outperformance of high-quality stocks over low-quality stocks is well-documented in financial literature although the actual measure of “quality” is disputed. Metrics such as a company’s earnings, dividend payments and debt levels have all been shown to have as much explanatory power in relation to a stock’s performance as the value factor.”
Of course, quality is never a hard-and-fast rule. Quality can mean different things to different people in the capital markets.
“Quality-based strategies try to capture the premium associated with high-quality stocks versus low-quality stocks,” the article added. “However, of all the risk factors, this is perhaps the hardest to define as investors are divided on the best way to measure quality.”
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