Low volatility, for myriad reasons, is the investment factor stealing most of the limelight this year, but the quality factor is not too far behind. The iShares Edge MSCI USA Quality Factor ETF (QUAL) is clearly one of the exchange-traded funds benefiting from the flight to quality.
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While different issuers of exchange-traded funds may have varying definitions for quality, hallmarks of this widely studied factor include high return on equity, consistent earnings growth, low debt, robust return on assets and, in many cases, steadily rising dividends.
QUAL follows the MSCI USA Sector Neutral Quality Index and is home to 125 large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage), according to iShares.
Quality Through QUAL
Investors are taking note of the advantages of quality as offered by QUAL. A recent surge of inflows to the ETF confirm as much.
QUAL has pulled in more than $300 million in the past week or so, giving it a boost of more than $1.2 billion now in new assets created in the fund year-to-date. While QUAL only launched in July of 2013, it is now a more than $3.2 billion fund, and likely becoming more familiar to a broader base of ETF portfolio managers and investors, said Street One Financial Vice President Paul Weisbruch in a recent note.
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While interpretations of the quality factor vary among ETFs, one of its hallmarks is sturdy balance sheets. That trait could be why QUAL's largest sector weight is 21.6 percent to technology, an advantage of nearly 700 basis points over financial services, the ETF's second-largest sector allocation. Healthcare, consumer discretionary and staples names combine for about 38 percent of QUAL's lineup.
With earnings consistency and visibility along with lower volatility being integral elements to the quality factor, it is not surprising that energy and materials names represent less than 10 percent of QUAL's lineup.
QUAL has a beta of 0.92 and a three-year standard deviation of 10.7 percent, according to issuer data.
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