iShares, Ariz. State Launch Quality ETF

July 18, 2013

The fourth MSCI-linked ETF in the factor-based ETF lineup finally comes to market Thursday.

iShares, the largest ETF provider in the world, today launched a U.S. equities ETF that focuses on quality stocks included in the broad MSCI USA Index, rounding out a lineup of factor-based ETFs the firm launched earlier this year in conjunction with the Arizona State Retirement System.

The iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL) invests in U.S. large- and midcap stocks selected through fundamental metrics of quality. QUAL costs 0.15 percent, or $15 per $10,000 invested a year.

Tracking the MSCI USA Quality Index—a benchmark based on the market-capitalization-weighted MSCI USA Index—the fund looks at three fundamental factors to select quality stocks: high return on equity; stable year-over-year earnings growth; and low debt-to-equity, the prospectus said.

In many ways, a “quality” fund was the natural addition to the group first listed on April 18 that include the iShares MSCI USA Momentum Factor Index Fund (NYSEArca: MTUM), the iShares MSCI USA Size Factor ETF (NYSEArca: SIZE) and the iShares MSCI USA Value Factor ETF (NYSEArca: VLUE), all of which are constructed around the broad, market-capitalization-weighted MSCI USA Index.

QUAL is also expected to be seeded with Arizona State Retirement System money, as the previous three funds were, with $100 million each.

The $31 billion pension fund is the first pension plan to provide the seed money for low-cost ETFs in a collaboration with iShares that reflects its desire to express tactical views through factor rotation in a tradable wrapper.

“The idea was to be able to create some type of an overlay program to enable us to adjust the factor-risk exposure of our combined equity set,” Dave Underwood, Arizona State assistant CIO and head of equities, recently told Journal of Indexes’ Heather Bell in an interview. “It’s less about alternative beta, although we do have a strong appreciation of it. It’s more that these tools (i.e., the risk-factor ETFs) are a means to an end.”

There’s no question that one of the big attractions of factor investing is that it allows investors who want to express a tactical view the ability to enhance returns and/or reduce risk. Demand for these factor-based strategies—or so-called enhanced beta funds that carve up the investment universe on the basis of specific factors like momentum, risk and value—are picking up pace as investors look for diversification at a time when correlations among assets are rising. Correlation among factors is often quite low.

As of May 31, some 125 securities comprised the index underlying the strategy, with consumer discretionary, energy and information technology companies leading sector allocations, according to the filing.


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