The New MSCI USA Quality Factor ETF From iShares In Focus

Blackrock iSharesiShares, the world’s largest provider of ETFs, was recently back on the product development front, pushing out another new fund to investors. Their latest addition looks to target the surging domestic stock market with the MSCI USA Quality Factor ETF (NYSEARCA:QUAL).

Below, we have highlighted some of the key details regarding this new fund, for investors looking to tilt their portfolios to quality growth companies based in the American market:

QUAL ETF in Focus

QUAL looks to follow the MSCI USA Quality Index, which is based on the MSCI USA Index and includes large and mid cap stocks in the U.S. equity market. The benchmark seeks to capture performance of quality growth stocks by identifying companies that have the highest quality scores based on three main variables; high return on equity, stable earnings growth (yoy), and low financial leverage (see 3 Hot Sector ETFs Surging to #1 Ranks).

In total, the portfolio holds 125 securities in its basket, putting about 40% into its top ten holdings. Some of the top names in this group include many of the most well-known American firms such as ExxonMobil (XOM), Chevron (CVX), and Google (GOOG), all of which account for about 5% of the portfolio.

For sectors, tech dominates at nearly 40% of the portfolio, followed by consumer discretionary (20.25%), energy (13.1%), and health care (10.7%). Interestingly, consumer staples and materials were light in terms of allocations (combine for about 8.8%), while one of the biggest sectors in the economy—financials—accounts for just 1.6% of the portfolio.

Investors should also note that this is a pretty cheap ETF, charging investors 15 basis points a year in fees, putting it in line with a number of other products in the space. Another important factor to take into account is that the fund is well-seeded thanks to iShares’ partnership with the Arizona State Retirement System which put $100 million into the ETF, helping the product to have just over $107 million under management in its first week.

How Does It Fit In A Portfolio?

This ETF could be an interesting pick for investors who are looking to increase their exposure to the American market, but are seeking to shift holdings to stocks that have solid growth prospects, low leverage, and a high ROE. The fund could also be appropriate for investors seeking a low cost choice in the space, or a U.S. fund that has a minimal allocation to the financial market.

The fund, however, probably won’t be a good choice for investors who want well diversified exposure across sectors, as two segments—tech and consumer discretionary—make up nearly three-fifths of the total assets. Additionally, the ETF does have a large cap focus, so some investors may have many of QUAL’s top securities in their portfolio already.

ETF Competition

The move helps to round out the new suite of ETFs that were launched earlier in the year, which were also seeded by the Arizona State Retirement System. The other three products were the MSCI USA Momentum Factor Index Fund (MTUM), the MSCI USA Size Factor ETF (SIZE), and the MSCI USA Value Factor ETF (VLUE), making a ‘quality’ fund a logical next step for the group.

In terms of competing funds though, arguably the biggest could be the PowerShares S&P 500 High Quality Portfolio (SPHQ). This ETF has a little over a quarter billion in assets, while its volume is around the 50,000 share mark per day.

As you can guess form the name, the fund also provides exposure to ‘high quality’ stocks, although its focus is on the growth and stability of earnings and dividends. Its holdings profile is very different though, with industrials, consumer discretionary, and consumer staples making up the top three sectors. In fact, technology makes up just five percent of SPHQ’s portfolio (seeInside the High Quality ETF).

Given this very different holdings profile, there could definitely be room for QUAL in the ETF world, particularly for low cost investors seeking a different way to play the U.S. market. However, it is worth noting that beyond the Arizona seeding, the rest of the group hasn’t really added too much in assets, so it will be interesting to see if the quality-focused ETF can have better success in attracting new investors.

This article is brought to you courtesy of Eric Dutram.

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