This year has shaped out to be quite kind for equity investors as bullish price action remains the dominant theme on Wall Street. iShares is looking to take advantage of all the euphoria with their latest product launch aimed at investors in search of a “core” holding to fill out their portfolio’s equity component; the latest addition to the issuer’s towering lineup of nearly 300 exchange-traded products is the MSCI USA Quality Factor ETF (QUAL) [see also The Cheapest ETF for Every Investment Objective].
What Is “Quality”?
The newly launched QUAL is actually a twist on an existing benchmark, the broad MSCI USA Index. The iShares fund takes a factor-based approach in trimming down the starting universe by employing a series of fundamental metrics screens to narrow down only the highest-quality of companies. The methodology behind QUAL is based on three metrics of quality: high return on equity, stable year-over-year EPS growth, as well as low debt-to-equity [see also How To Be A Better Bear: Short Selling vs. Inverse ETFs?].
The result is a portfolio comprised of roughly 125 U.S. large and mid-cap securities with a tilt towards the consumer discretionary, energy, and information technology sectors. QUAL is expected to be seeded with Arizona State Retirement System funds, similar to the three other factor-based ETFs that the firm rolled out this past April which are also based around the MSCI USA Index. QUAL is also expected to charge 0.15% in annual expense fees, similar to the previously mentioned sister ETFs which are:
- MSCI USA Momentum Factor ETF (MTUM, A-): This ETF picks the securities with the highest momentum characteristics.
- MSCI USA Size Factor (SIZE, A-): This ETF rebalances in a way that stocks with relatively smaller average market capitalization and lower risk weightings based on the index provider’s methodology constitute a higher percentage of the underlying index.
- MSCI USA Value Factor (VLUE, B+): This ETF seeks out securities which are undervalued relative to their peers [see also 101 High Yielding ETFs For Every Dividend Investor].
Meet The Competition
QUAL will be joining one of the most competitive segments within the ETF universe, the All Cap Equities ETFdb Category, which currently consists of 45 funds with an average expense ratio of 0.47%. While QUAL certainly has an upper hand when it comes to expenses, the fund will still face very stiff competition from more established products in the space, including these top three bellwethers:
- Vanguard Total Stock Market ETF (VTI, A) with nearly $33 billion in assets under management
- iShares Russell 3000 Index Fund (IWV, A) with over $4.5 billion in AUM
- iShares MSCI USA Minimum Volatility Index Fund (USMV, A) with over $3 billion in AUM
USMV’s success is encouraging for QUAL given the proven track record which suggests that there is in fact significant investor demand for factor-based products.
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Disclosure: No positions at time of writing.