Hunting For The Right Quality ETF

October 23, 2019

The iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL) has now gathered more than $4.5 billion in fresh net assets this year, making it the biggest quality ETF in the market today, and a very popular defensive-type factor ETF in 2019. But QUAL isn’t the only quality ETF available.

The fund’s asset-gathering success should come as no surprise in a year when so many investors have looked for ways to stay allocated to risk assets, but play defense at the same time amid fears of a recession given the slowdown in global economic growth.

Tracking an index of large and midcap U.S. stocks selected by quality metrics such as high return on equity, low debt-to-equity ratio and stable earnings growth, QUAL is today a $13 billion ETF, offering access to 127 securities for 0.15% in fees.

“Amid market volatility and an aging economic and business cycle, quality becomes more important for investors,” BlackRock’s Tony DeSpirito, director of investments for U.S. fundamental active equity, said in a recent blog. “We see a lot to like about quality, dividend-growing stocks in today’s late-cycle, low-interest-rate world.”

Investors Have Choices

QUAL’s size and liquidity—as well as a clear, easy-to-understand mandate to deliver access to the quality factor—make it a go-to choice for many investors.

But it’s not the only option. For example, the Invesco S&P 500 Quality ETF (SPHQ), which has $1.5 billion in total assets, picks stocks with strong fundamentals from the S&P 500 universe.

There’s also the O'Shares FTSE U.S. Quality Dividend ETF (OUSA), which blends the quality factor with low volatility and dividend yield in a strategy that has more than $540 million in total assets.

 

(You can see all ETFs offering access to quality in our Smart Beta ETF Channel)

 

What To Look For When Picking A Quality ETF

First, a quick look at performance. Year to date, these quality ETFs have kept pace—and some have outpaced—the returns of the S&P 500, as measured below by the SPDR S&P 500 ETF Trust (SPY):

 

Chart courtesy of StockCharts.com

 

A lot of times the choice to play defense with a factor such as quality isn’t driven by a desire to outperform as much as it is to have some form of downside protection in a portfolio, but strong returns are certainly a boon here.

Beyond performance, here’s what else you should know …

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