With the S&P 500 hurtling toward record highs and highs in recent months, many investors are worried about the upside. The impulse to chase loses its appeal when the dimensions seem uncomfortably small. In this case, it may be more prudent to look for targets with predictable revenue and cash flow—in other words, companies that demonstrate “quality” with a high return on investment, consistent growth, strong balance sheets, and so on.
Those who want to invest in quality but find it difficult to choose individual names can turn to any number of exchange-traded funds (ETFs) based on this factor. Quality has a broad meaning in the investment world and can mean profitability, stability, balance sheet strength, cash flow generation, and more, so investors would be wise to consider how any quality-focused ETF defines this factor before building exposure.
Quality Fund at Low Price and Budget Addition
Rating of iShares MSCI USA Quality Factor ETF BATS: QUAL follows an index of large and mid-sized domestic companies selected for consistent earnings growth, low debt, and high return on equity.
iShares MSCI USA Quality Factor ETF today
iShares MSCI USA Quality Factor ETF
From 01:05 PM East
- 52 week interval
- $175.20
▼
$217.65
- Dividend Yield
- 0.87%
- Assets Under Administration
- $45.17 billion
As one of the earliest focused ETFs, QUAL helped set the stage for many later funds to take a similar approach. Its 129 holdings are mostly focused on large technology firms but also include smaller names and other sectors. However, investors are unlikely to find this portfolio sufficient as a means of accessing the broader US market.
This company QUAL paid a dividend of 0.9 %. Considering the fund’s year-to-date return is around 8%, slightly below the broader market, the dividend bonus may help further entice some investors to look at the more competitive performance of the past few months. However, a quality-focused fund may not be the place to go for market-beating returns. Indeed, an ETF like QUAL is one to watch when the market pulls, to see if its strategy can help protect it from broader volatility. With an expense ratio of 0.15%, QUAL is not an expensive fund, a fact that may help convince many investors to take a chance (although its asset base and trading volume are as strong as they are).
High Dividend, But Comes with Double the Cost
In contrast, the WisdomTree US Quality Dividend Growth Fund NASDAQ: DGRW a quality-themed ETF with a specific dividend focus: the fund offers a yield of 1.3%.
WisdomTree US Quality Dividend Growth Fund Today
WisdomTree US Quality Dividend Growth Fund
- 52 week interval
- $81.28
▼
$98.00
- Dividend Yield
- 1.28%
- Assets Under Administration
- $16.72 billion
DGRW is narrower in scope than QUAL because it only targets large US stocks, but its nearly 200 holdings mean the portfolio is actually quite different from QUAL’s alternatives.
Just because the basket has multiple positions, however, doesn’t mean focus isn’t a concern. NVIDIA Corp. NASDAQ: NVDAApple Inc. NASDAQ: AAPLand Microsoft Corp. NASDAQ: MSFT alone accounts for 20% or more of invested assets, for example.
However, the 8% YTD returns are comparable to QUAL but also lag behind the broader market. For investors comparing these funds, the question may come down to whether prioritizing the dividend yield is worth the slightly higher fee—DGRW has an expense ratio of 0.28%, nearly double that of QUAL.
An Actively Regulated Dark Horse
A third quality-focused ETF is the Vanguard US Quality Factor ETF BATS: VFQYwhich distinguishes itself not only by being actively managed but also, surprisingly, by coming up with the lowest expense ratio of all three funds at only 0.13%. In this regard, VFQY looks at quality markers to include profitability and overall financial health, among others.
Vanguard US Quality Factor ETF today
Vanguard US Quality Factor ETF
Starting at 11:15 AM Eastern
- 52 week interval
- $137.23
▼
$166.22
- Dividend Yield
- 1.12%
- Assets Under Administration
- $467.12 million
VFQY also differentiates itself from other funds here by looking at the entire spectrum of market capitalization where managers evaluate US values for inclusion. While VFQY remains focused on large companies—nearly 60% of the portfolio is firms valued at $13 billion or more—it includes a significant portion of small and medium-sized firms among its nearly 450 assets. Since no single position represents even 2% of the portfolio, VFQY does not depend on the performance of individual names like the above funds.
Performance is slightly behind the other ETFs on this list at around 7% YTD, but VFQY offers a compelling 1.1% return.
Given the low price and already diversified portfolio, VFQY may be particularly attractive among quality-themed funds.
Before you consider the iShares MSCI USA Quality Factor ETF, you’ll want to hear this.
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