As has been widely noted, the quality factor is in style this year, benefiting a slew of exchange traded funds (ETFs). One of the funds that takes a unique approach to quality investing is the SPDR MSCI Quality Mix USA ETF (NYSEArca: QUS).
QUS tracks the equally-weighted MSCI USA Quality Mix A-Series Index, which is a combination of the MSCI USA Value Weighted, MSCI USA Minimum Volatility and MSCI USA Quality Indexes.
Dividends are often viewed as a quality trait, but investors looking for credible combinations of dividends and the quality should assess factors beyond pure yield. Those factors include return on equity (ROE) and a company’s ability to sustain and grow payouts. Quality stocks with track records of dividend growth can help investors mitigate some of the impact of increasing margin pressure, should that scenario emerge.
“If we pivot to US factor trends, we can see that quality continued on its upward trajectory in March, with performance ranking the top among all factors on a 3-month basis,” said State Street in a recent note. “Conversely, value continued rolling over and extended its underperformance trailing 12 months, and the size factor has started to reverse course and also trend south.”
What’s Next for Quality Factor?
The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.
For its part, QUS holds 620 stocks and “blends low volatility, quality and value exposures together in a single strategy,” according to the issuer.
QUS allocates 24.59% of its weight to technology stocks and almost a quarter of its combined weight to the healthcare and financial services sectors.
“Quality is extending its run as investors continue to focus on firms with quality balance sheets in this late-stage economic cycle,” according to State Street. “Value has historically underperformed at this stage in the cycle alongside a flattening yield curve, so its recent slump is consistent with this pattern. And size, as small-caps are more domestically oriented and economically sensitive, has begun its decline as a result of the deteriorating US growth outlook.”
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