Hunting For The Right Quality ETF

October 23, 2019

Different ETFs Will Offer You Different Takes

Sector tilts are just one of the ways these ETF differ. If capturing the quality factor is what you seek, looking carefully under the hood is key, because there’s no single definition of what quality is. As an investor, you have to make sure the ETF you choose is accessing what you believe quality to be.

For example, consider this side-by-side comparison of QUAL, SPHQ and OUSA’s factor tilts (relative to the FTSE Russell 3000 universe), provided by Style Analytics:

 

For a larger view, please click on the image above.

 

If you zoom in on the different quality metrics alone (such as ROE, net profit margin and earnings growth stability, below), these portfolios take different views on what makes for quality, making QUAL (the yellow square) perhaps the purest quality ETF as it tilts strongly into all quality measures:

 

 

Also notable here is that OUSA (red diamond) offers the most muted quality tilt relative to QUAL and SPHQ, probably because OUSA is a multifactor strategy.

Instead, OUSA stands out for its tilt toward low vol and high yield relative to its peers:

 

 

Helpful Tips

On the surface, you could argue that for quality exposure, QUAL’s “purest” quality tilt is the best fit. But it could be that SPHQ’s tech-heavy focus or OUSA’s multifactor approach (among many other ETFs to choose from, of course) better meet your overall portfolio goals. Tom Idzal, managing director at Style Analytics, offered the following tips to choosing the right fit for you: 

  • Understand how the ETF defines quality.

“Much like beauty, quality can be ‘in the eye of the beholder,’” Idzal said. “Investors need to make sure their own views on what is considered a quality company is reflected in the ETF they choose.”

  • Understand what else you’re getting along with the quality bias. 

“As we've seen in just these three examples, there can be other exposures or sector biases that will be important to understand,” he said. “Knowing what you own, beyond the category label or the name of the ETF, is very important.”

Contact Cinthia Murphy at [email protected]

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