“Quality is never an accident; it is always the result of intelligent effort.” — John Ruskin
Quality is a standard measure we use in many areas of life. Quality represents the merit, strength, character or degree of excellence possessed by someone or something.
We measure the quality of our lives, the goods we buy and services we use, our relationships with others, our performance on the job and, you guessed it, the stocks and funds in our portfolios.
Quality is one of five characteristics, or factors, used to determine the success of a stock, bond or fund in “factor” investing. A quality-focused, single-factor strategy is considered defensive, as it aims to seek out heavy-keeled companies with stable balance sheets and healthy financials.
Why choose the slower, full-keeled cruiser and not the racing yacht?
As I discussed in this week’s Eagle Eye Opener, the market assumptions that pushed stocks higher recently are still broadly in place, but we’ll need to continue to watch growth, earnings and global and domestic politics, which have seen some deterioration that could cause stocks to drop.
While expectations for the economy are tentatively positive, it never hurts to build some stability into your portfolio. So, let’s consider a solid, high-quality exchange-traded fund (ETF): iShares MSCI USA Quality Factor ETF (U.S. Cboe BZX: QUAL).
QUAL is the largest quality factor ETF in the market by a wide margin and is the “easiest” way to allocate to the quality factor. It tracks the underlying MSCI USA Sector Neutral Quality Index and has 125 large- and mid-cap holdings that are screened for profitability, low leverage and earnings consistency. The underlying index is rebalanced on a semiannual basis, using a representative sampling indexing strategy that reduces risk and keeps portfolio turnover low.
Currently, the fund’s top two areas of exposure are Information Technology and Financials. As we have seen in the market’s recent performance, technology companies continue to lead the positive stock market news as the artificial intelligence (AI) boom thunders, with strength and stability across the value chain.
Information Technology accounts for the majority of QUAL’s sector exposure at 30.66%. Financials and Healthcare follow at 12.35% and 12.07% of QUAL’s portfolio, respectively.
Top holdings include technology heavyweights Nvidia Corporation (NASDAQ: NVDA), Apple Inc. (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT), alongside major financial companies Visa Inc. (NYSE: V) and Mastercard Incorporated (NYSE: MA).
Chart courtesy of Stockcharts.com
QUAL is a $36 billion fund with a 0.15% expense ratio and a 1.23% yield. As of Jan. 31, the fund is up 4.80% over the past month, up 12.16% over the past three months and up 30.84% for the year to date. QUAL has outperformed the S&P 500 (NYSEArca: SPY) over the past year, rising 28% versus 23% for SPY.
To affirm the quote above, this ETF did not come about by accident; it is the result of smart observation and selective screening to create a stable and successful high-quality fund.
Aiming for the highest quality investments, investors should do their due diligence before adding any stock, fund or ETF to their portfolio.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.