QUAL Smashing Rival Factor Funds This Year

Quality, the factor that measures a company’s business model and competitive advantage, is beating competing traits of value, low-volatility, momentum and size this year thanks to its capturing surging returns of the Magnificent Seven tech stocks. 

The largest quality factor ETF, the $34 billion iShares MSCI USA Quality Factor ETF (QUAL), has returned 25% year-to-date through Nov. 20, according to etf.com data. Factor ETFs based on other characteristics aren't faring as well. 

Factor investing focuses on certain traits exhibited by companies. According to information from BlackRock Inc., five of those factors that have outperformed over the long term are small size, high momentum, value, low volatility and high quality. Quality focuses on companies with high profit margins, low debt and consistent earnings. According to BlackRock’s documents, these companies have tended to do best when the economy is slowing like the U.S. economy has done this year. 

The Magnificent Seven, a collection of seven mega-cap tech and tech-adjacent firms such as Apple Inc. and Nvidia Corp., has driven the majority of U.S. stock market returns this year. That means that QUAL’s exposure to these companies relative to other factor-based funds boosted its returns.  

Value, momentum and other characteristics trailed QUAL. The iShares MSCI USA Value Factor ETF (VLUE), iShares MSCI USA Min Vol Factor ETF (USMV) and the iShares MSCI USA Momentum Factor ETF (MTUM) have all returned about 5% this year, while the iShares MSCI USA Size Factor ETF (SIZE) has gained 8%. The broader U.S. stock market, as measured by the SPDR S&P 500 ETF Trust (SPY), has returned 20%.  

“In the U.S., given the returns that we've seen, the Magnificent Seven definitely dominated returns this year,” said Robert Hum, U.S. head of Factor ETFs at BlackRock, “So if you’re not holding those names, you're going to wildly deviate from the market.”  

Factor Investing Over the Long Haul 

BlackRock data provided to etf.com shows that the Magnificent Seven stocks score far higher on quality metrics than the other four factors, putting QUAL in position to outperform. 

Hum emphasized that factor investing is meant to be a long-term strategy. 

“It is also important to note that we should not approach factors based on one year's performance and/or data,” Hum said. He stressed that the evidence for factor investing shows historical outperformance over long periods. 

Contact Gabe Alpert at [email protected]