The quality factor is one of the most venerable investment factors and plenty of exchange traded funds offer investors exposure to this factor. The iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL) is an increasingly popular option for investors looking to tap the quality factor.
The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.
QUAL, which turned four years old last month, follows the MSCI USA Sector Neutral Quality Index and holds 125 stocks.
“The index identifies high quality growth companies that trades in the United States with three fundamental factors: high return on equity [ROE], stable and consistent YoY earnings growth, and a low financial leverage. With an asset under management of 3.55 billion and an average trading volume of 326K in the past 10 days, the ETF offers enough liquidity for investors,” according to a Seeking Alpha analysis of the ETF.
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.
While technology is often associated with the growth and momentum factors, the sector is home to some of the best balance sheets in the U.S. and steady dividend growth, bolstering its quality credibility. As such, technology is QUAL’s largest sector weight at over 23%. Financial services and healthcare stocks combine for almost 29% of the ETF’s weight.
Related: A Pure Value Idea in the Smart Beta Space
Conversely, QUAL lacks exposure to sectors that are often associated with high debt burdens. For example, high-yielding utilities and telecom names combine for barely more than 5% of the ETF’s weight.
“Since its inception in July 2013, QUAL ETF has generated an average annual return of 12.45%. This is slightly higher than the average annual return of S&P 500’s 11.99%. Its 3-year average annual return of 10.51% is also higher than S&P 500’s 9.27%. As can be seen, a $10,000 invested in July 2013 will grow to about $16,000 in July 2017,” according to Seeking Alpha.
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.