Why The Quality Factor Should Be In Your Portfolio

The quality investment factor is shinning in the past few years. These are companies that are good corporate stewards of their balance sheets, throw off lots of free cash low, have much more stable earnings than most, and do not use excessive leverage (as much as some). David Rosenberg, now of www.RosenbergReasearch.com , had some great charts in his notes this week. He split the S&P 500 into credit rating tranches from AAA (top quality corporate) to B (junk rating). The difference is massive. And it would be far worse if the Federal Reserve was not supporting many of these zombie companies that have not been good corporate stewards of the balance sheet. A business model that only works because money is cheap is generally UNSUSTAINABLE. The bankruptcy rates in high yield companies could easily be over 12% before this cycle is over Rosenberg’s research believes.

The quality investment factor

Quality is defined by low debt, stable earnings, consistent asset growth, and strong corporate governance. Investors can identify quality stocks by using common financial metrics like a return to equity, debt to equity and earnings variability. This also fits with many of the ESG considerations as well.

There are a few ETFs that focus on this factor and are worth considering on this market correction we are seeing.

ZUQ BMO High Quality Index ETF
SPHQ Invesco S&P 500 Quality ETF
QUAL MSCI USA Quality Factor ETF

And globally,

ZGQ BMO All Country World High Quality Index ETF
ZEQ BMO Europe High Quality (CAD-Hedged) ETF

Relative to the MSCI All World Index ETF, Quality has performed better by over 4% per year.

Have a look at some of these and follow me and subscribe to my new YouTube channel LarryBermanOfficial for my weekly market recap and ETF bull and bear picks of the week.

 

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One thought on “Why The Quality Factor Should Be In Your Portfolio”

  1. Avatar
    Shawn Kelly says:

    Thank you Larry for these great charts. Also love your top line You Tube videos on Saturday morning. ? How would you compare for a long term hold VT vs ZGQ.

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