‘Quality’ ETFs use metrics such as return on equity (ROE) and earnings stability to identify high-potential companies and generate above-market returns.
The BetaShares Global Quality Leaders ETF (ASX: QLTY) and VanEck Vectors MSCI World ex-Australia Quality ETF (ASX: QUAL) are two ETFs trying to do just that.
QLTY ETF
The BetaShares Global Quality Leaders ETF (ASX: QLTY) invests in a portfolio of 150 companies identified as quality leaders due to their return on equity (ROE), debt-to-capital ratio, cash flow generation ability, and earnings stability. Basically, QLTY tries to identify companies with a strong financial position and high earnings growth potential.
QLTY is a relatively new ETF, listed in November 2018, but it is quickly gaining popularity and scale. The ETF currently has over $100 million in funds under management (FUM) and is the most viewed ETF on the BetaShares website. Around 65% of the companies in the QLTY ETF are US-listed, but investors also get exposure to Japan, Switzerland, France, and Denmark, among other countries.
The ETF is heavily skewed towards information technology, which makes up around one-third of the portfolio, and another quarter is invested in healthcare shares. This lean towards tech and healthcare has been profitable, with the QLTY ETF returning nearly 20% per year since listing (although it’s too short of a track record to really judge past returns).
QLTY charges a management fee of 0.35% per year, and you can read more about the ETF in our free report.
QUAL ETF
The VanEck Vectors MSCI World ex-Australia Quality ETF (ASX: QUAL) is VanEck’s version of a global quality ETF, identifying companies with high ROE, stable year-on-year earnings growth, and low financial leverage. QUAL has double the holdings of QLTY, investing in just under 300 companies.
QUAL is a longer-running ETF than QLTY, having listed in 2014. It has also been a very popular ETF, amassing more than $1.5 billion in FUM. QUAL is slightly more skewed towards the US than QLTY, with 70% of FUM invested in US-listed companies, but it also provides exposure to a long list of European economies.
Much like its competitor, QUAL is heavily concentrated in information technology and healthcare companies, which is a big contributor to its returns of 16.5% per year over the last six years. To give an idea of how the ‘quality’ factors affect returns, the MSCI World ex-Australia Quality Index has returned 14% per year over the last five years while the MSCI World ex-Australia Index has returned 10.5% per year.
QUAL charges a slightly higher management fee of 0.4% per year but it has a lower spread than QLTY, meaning the cost to buy and sell shares is lower. For that higher management fee you also get a longer track record, so QUAL should not be excluded from consideration for its higher fees.
