A Timely Quality, Multi-Factor Investing Idea

MarketsETF Trends

This article was originally published on ETFTrends.com.

Investors looking for a multi-factor exchange traded fund that leans toward the quality factor can consider the FlexShares US Quality Large Cap Index Fund (NasdaqGM: QLC).

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QLC selects and weights companies based on management efficiency, profitability and cash flow to determine quality, according to FlexShares. Management efficiency is a quantitative evaluation of a firm’s deployment of capital and its financing decision. Profitability scores help weed out firms with wider margins, which may be better positioned to grow. Lastly, cash flow signals the liquidity level of a company, so those with higher cash flows may be better situated to take advantage of potential opportunities or enjoy a financial cushion in down turns.

The ETF follows the Northern Trust Quality Large Cap Index, which “is designed to measure the performance of a universe of large capitalization securities which demonstrate characteristics of better quality, attractive valuation and positive momentum,” according to the issuer.

QLC, which debuted in September 2015, holds 135 stocks, about a quarter of which are technology names. The financial services and healthcare sectors combine for almost 29% of the fund's weight. Consumer discretionary and industrial stocks combine for over 19%.

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.

QLC skirts value traps by including momentum characteristics, which will be determined through a stock’s price history to capture a picture of the recent performance and by using analysts analyst outlooks to get a sense of future sentiment regarding a company. Nearly 49% of QLC's holdings are considered value stocks and 22.8% are considered growth names.

None of QLC's holdings exceed weights of 2.6%. The ETF's top 10 holdings include Apple Inc. (NASDAQ:AAPL), Cisco Systems Inc. (NASDAQ:CSCO), Chevron Corp. (NYSE:CVX) and Boeing Co. (NYSE:BA).

The ETF charges 0.32% per year, or $32 on a $10,000 investment.

For more on smart beta ETFs, visit our Smart Beta Channel.

Tom Lydon's clients own shares of Apple.

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