A recent article in Financial Advisor magazine cast light on the top performers so far this year when it came to factor investing and sitting on the throne was quality. In particular, the iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL).
QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks with quality characteristics as identified through certain fundamental metrics. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents.
The index is based on a traditional market capitalization-weighted parent index, the MSCI USA Index.
“Sitting atop this year’s elite performers is the iShares Edge MSCI USA Quality Factor ETF (QUAL),” the Financial Advisor article said. “This fund has climbed 28.8%, beating the Schwab U.S. Broad Market ETF (SCHB) by 263 basis points year to date. QUAL has also outperformed peer factors like momentum and value.”
“QUAL contains 125 U.S. large- and mid-cap stocks that are screened for quality yardsticks such as return on equity, earnings variability and debt to equity,” the article noted. “QUAL’s industry sector weighting tilts heavy toward technology stocks, which account for almost 25% of the fund’s equity exposure. Healthcare (13.6%), financials (12.4%) and communication services (10.4%) are the next largest sector weightings. The fund’s top three holdings are Apple, Johnson & Johnson and Mastercard.”
The article also highlighted the importance of getting international exposure by mentioning factor investing that stretches overseas. In particular, one fund to consider is the iShares Edge MSCI Intl Quality Factor ETF (NYSEArca: IQLT), which seeks to track the investment results of the MSCI World ex USA Sector Neutral Quality Index—it measures the performance of international developed large- and mid-capitalization stocks exhibiting relatively higher quality characteristics as identified through three fundamental variables: return on equity, earnings variability and debt-to-equity.
“Factor investing isn’t limited to U.S. markets,” the article noted. “Which international markets have delivered the best gains? The iShares Edge MSCI Intl Quality Factor ETF (IQLT) has gained 23% since the start of the year. IQLT has outdistanced all single-factor peers along with even plain-vanilla peers like the Vanguard FTSE Developed Markets ETF (VEA). IQLT screens stocks within its developed markets mandate using quality measures such as return on equity, earnings variability and debt to equity. The fund holds 301 stocks with Roche Holdings, Nestle and AIA Group the top three positions.”
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