Investors often look to low volatility strategies when equity market volatility increases, but the quality factor is worth considering in such an environment as well. The iShares Edge MSCI USA Quality Factor ETF (Cboe: QUAL) is one of the exchange traded funds 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 specific fundamental metrics. QUAL invests its assets in component securities comprised of the index as well as certain futures, options and swap contracts, cash and cash equivalents.
The approach is working as highlighted by QUAL’s 2018 returns of more than 10%.
“Quality companies generally include firms with high return-on-equity (ROE), earnings consistency and low leverage. These characteristics suggest safety, which investors put a premium on when volatility is moving higher,” said BlackRock in a recent note.
Other ‘QUAL’ ETF Perks
Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar. However, as the bull matures, investors often exhibit a preference for higher quality fare with more compelling valuations.
Historical data confirm that the quality factor works as broader market volatility creeps higher.
“As a refresher, it is generally a good idea to hold some quality in a portfolio. Since 1994 quality, measured by the MSCI U.S. Quality Index, has produced higher monthly average returns than the S&P 500. In addition, the relative performance of quality versus the S&P 500 tends to be highest when the VIX is rising,” according to BlackRock.
Related – Real Assets 101: Key Characteristics Investors Need to Know
Speaking of volatility, QUAL’s three-year standard deviation of 8.99% is slightly below that of traditional domestic equity benchmarks.
The ETF holds 124 stocks, over 41% of which hail from the technology and healthcare sectors. Consumer discretionary and financial services names combine for 26.63% of the fund’s weight.
For more on smart beta ETFs, visit our Smart Beta Channel.