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iShares, the world’s largest provider of exchange-traded funds (ETFs), has expanded its smart beta ‘factor’ ETF suite with the launch of the iShares MSCI USA Quality Factor ETF (QUAL) on the NYSE Arca.
The new ETF is linked to the MSCI USA Quality Index and provides exposure to a quality growth strategy based on US stocks.
It joins the firm’s existing range of factor ETFs, which provide investors with index-based access to a specific factor. Factors previously covered in the range include momentum, size and value.
Factors are a set of investment characteristics that explain the risk and return behaviour of an asset or stock. Every asset has a unique set of factor exposures – such as quality, value, size and momentum – that influence the asset’s return.
The MSCI USA Quality Index targets the quality factor. Companies representative of this factor tend to have a high return on equity (ROE), stable earnings that are uncorrelated with the broad business cycle, and strong balance sheets with low financial gearing.
The index identifies these stocks by calculating a ‘quality score’ for each security in the parent MSCI USA Index based on three main fundamental variables: return on equity, debt to equity, and earnings variability. Stocks are then ranked by their combined score with the top 125, weighted by the product of their market capitalisation and quality score, forming the index, subject to a weight cap of 5%.
The top five holdings are all companies investors commonly associate with quality earnings and growth: ExxonMobil, Microsoft, Google, Chevron and Apple. These are followed by similarly well-respected stocks such as IBM, Home Depot, Oracle, McDonald’s and Intel. At the sector level, the index is dominated by technology, consumer discretionary and energy companies, which add up to more than 70% of the index. Unsurprisingly, the financials sector, which in recent years has been linked to significant value destruction, represents just 1.5% of the fund.
iShares developed each of the factor ETFs at the request of institutional investors, most notably the Arizona State Retirement System (ASRS), which provided seed capital. The funds are useful to investors who desire exposure to specific individual factors so they can overweight or hedge a single factor that has historically explained a significant part of companies’ return and risk over the long term.
Patrick Dunne, Head of iShares Global Markets and Investments, commented: “We are excited to extend our Factor ETF offering with the launch of the iShares MSCI USA Quality Factor ETF, which was possible through close collaboration with clients such as ASRS and through our partnership with MSCI. iShares launched these products based on client demand for index-based exposure to factors that can help them adjust the factor-risk exposure within their equity portfolio.”
The full suite of iShares factor ETFs is as follows:
iShares MSCI USA Momentum Factor ETF (MTUM)
iShares MSCI USA Size Factor ETF (SIZE)
iShares MSCI USA Value Factor ETF (VLUE)
iShares MSCI USA Quality Factor ETF (QUAL)
Each fund comes with an expense ratio of 0.15%.