Quality Factor Smart Beta ETFs for Late Business Cycle

With the markets heading toward the later stages of a typical economic cycle, exchange traded fund investors should look to strategies that are better suited for the current environment.

“Most people are seeing the market structure, the market cycle entering its later phases, so we’ve seen this real shift in flows away from the growth and momentum stocks, which are a lot more pro-cyclical, back toward things like quality,” Luke Oliver, Managing Director, Capital Markets, DWS, said at Inside ETFs 2019.

“In a market like this, there is some real value to be added by applying some of those factors, whether it’s single factors or multi factors,” he added.

The quality factor helps hone in on the quality of a company earnings as a better gauge of future earnings performance. The underlying indices may provide a quantifiable measure of each company’s profitability, efficiency, earnings quality and leverage.

DWS offers a Comprehensive Factor ETF suite, including Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS ), Xtrackers FTSE Developed ex US Comprehensive Factor ETF (DEEF ), Xtrackers Russell 2000 Comprehensive Factor ETF (DESC ) and Xtrackers FTSE Emerging Comprehensive Factor ETF (DEMG ). The X-trackers multi-factor suite selects components based on a broader five factors, including quality, value, momentum, low volatility and size.

Additionally, the Xtrackers Russell 1000 US QARP ETF (QARP) focuses more on the quality factor. QARP tries to identify companies that have strong quality scores relative to their peers while also looking at the value scores of the securities to avoid companies that are potentially over-priced. The quality focus also seeks to avoid so-called value traps, or companies with favorable valuation metrics as they approach bankruptcy, that a pure value exposure would likely fall into.