QUAL includes quality stocks in its portfolio
The iShares MSCI USA Quality Factor ETF (QUAL) is a smart beta fund that seeks to track the investment results of the MSCI USA Sector Neutral Quality Index. The index selects stocks on the basis of the quality score that each stock exhibits. According to the fund’s prospectus, “the quality score of each security in the parent index is determined based on three fundamental variables: high return on equity, stable year-over-year earnings growth and low debt to equity.”
QUAL has a vast portfolio
QUAL doesn’t necessarily invest 100% of its net assets in the parts of its index. Currently, it manages a net asset of $1.14 billion. It’s distributed over 125 securities. QUAL’s top five holdings include Microsoft (MSFT), Johnson & Johnson (JNJ), ExxonMobil (XOM), Apple (AAPL), and Gilead Sciences (GILD). They account for almost 22.50% of QUAL. QUAL is a passively managed fund. It has an expense ratio of 0.15%. Its current YTD (year-to-date) return is 5.12% as of August 14, 2015. Since its inception on July 16, 2013, its total return is 14.26%.
IQLT is QUAL’s international version
The iShares MSCI International Developed Quality Factor ETF (IQLT) is a similar fund to QUAL with respect its strategy for selecting stock. The main difference between the two is that IQLT’s index selects stocks from a global perspective. In contrast, QUAL invests in stocks that are only issued in the US. Since IQLT can invest in stocks that are issued internationally, its investment horizon increases. It also creates more opportunities for targeting market inefficiencies.
In the next part of this series, we’ll discuss iShares’ smart beta funds that take the size and value of stocks into consideration for writing the index.