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Are Stock Quality ETFs Working?

| | Posted in: Fundamental Valuation

Are stock quality strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider five ETFs, all currently available (from oldest to youngest):

  • Invesco S&P 500 Quality ETF (SPHQ) - seeks to track performance of S&P 500 stocks with the highest quality scores based on firm return on equity, accruals ratio and financial leverage ratio, reformed semi-annually.
  • iShares Edge MSCI USA Quality Factor ETF (QUAL) - seeks to track performance of U.S. large-capitalization and mid-capitalization stocks selected based return on firm equity, earnings variability and debt-to-equity.
  • iShares Edge MSCI Intl Quality Factor ETF (IQLT) - seeks to track performance of large-capitalization and mid-capitalization developed international stocks screened for attractive return-on-equity, earnings variability and debt-to-equity.
  • Fidelity Quality Factor ETF (FQAL) - seeks to track performance of U.S. large-capitalization and mid-capitalization stocks with a higher firm quality profile than the broader market.
  • Vanguard U.S. Quality Factor ETF (VFQY) - applies a rules-based quantitative model to select U.S. common stocks with strong fundamentals (strong profitability and healthy balance sheets) across market capitalizations, sectors and industry groups.

Because some available sample periods are very short, we use daily return statistics, including compound annual growth rate (CAGR) and maximum drawdown (MaxDD). We use four benchmarks according to fund descriptions: SPDR S&P 500 (SPY), iShares MSCI ACWI ex U.S. ETF (ACWX), Vanguard Russell 1000 Index Fund ETF (VONE) and iShares Russell 3000 ETF (IWV). Using daily returns for the stock quality ETFs and benchmarks as available through June 2020, we find that:

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