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Quality ETF hits all-time high, but one CIO sees a better opportunity

Investors are all about quality.

The iShares MSCI USA Quality Factor ETF (QUAL) hit an all-time high for the third day in a row on Wednesday in a strong week for the nearly $20 billion fund, which focuses on “high return on equity, stable year-over-year earnings growth and low financial leverage,” according to its website.

Its top 10 holdings as of Aug. 25 are as follows:

iShares MSCI USA Quality Factor ETF: Top 10 Holdings

Name Weight (%)
Apple 4.79%
Facebook 4.17%
Nike 3.87%
Coca-Cola 3.71%
Microsoft 3.54%
Johnson & Johnson 3.28%
Mastercard 3.26%
Visa 3.15%
UnitedHealth Group 2.31%
Booking Holdings 2.20%

QUAL was up nearly 1% in Wednesday afternoon trading. The ETF is up just over 6% year to date versus the S&P 500’s 7.5% gain.

“Quality over time is one of these factors that’s persistent, pervasive, robust,” John Davi, chief investment officer and founder of Astoria Portfolio Advisors, said Monday on CNBC’s “ETF Edge.”

He added that QUAL is slightly underperforming the S&P since the March 24 bottom.

“There is a change in market leadership, and that, I think, is important,” Davi said. “You want to have a broad, diversified basket. You don’t … want to own [only] large-cap tech stocks.”

Right now, Davi’s firm is trimming its exposure to quality in favor of themes that fit more with the current economic backdrop, the CIO said.

With the Federal Reserve “anchoring” interest rates near 0% and in a phase of quantitative easing, “Equities and stocks, broadly speaking, have a green light,” he said.

“We are shifting our portfolio to owning more cyclically oriented stocks and sectors,” Davi said. “Small caps, mid caps, they tend to grow a little bit faster than the overall market, and sectors like energy, industrials, materials — that’s a new twist from us at Astoria Advisors, and I think that’s what investors should be doing as well.”

Christian Magoon, the founder and CEO of Amplify ETFs, said in the same “ETF Edge” interview that QUAL was “interesting” and that its resilience should “last for quite a long time.”

“After the Covid crisis, people really want resilience in the companies they own, and QUAL really provides that,” Magoon said. “It looks at companies that have stable earnings, high return on equity, low debt to equity, all characteristics to kind of batten down the hatches, if you will, against kind of this unusual economy.”

His one caveat against the fund had to do with its portfolio. QUAL is 27.5% information technology stocks, a relatively heavy weighting toward a red-hot segment of the market.

“It might be getting a little ahead of itself in terms of its technology and communication exposure,” Magoon said.


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