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ETF Specialist

Diversified Exposure to Quality Stocks

This ETF offers a low-cost way to invest in profitable companies with durable competitive advantages.

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Good companies don't always make good investments, but they may offer attractive returns relative to the market over the long term when they are trading at reasonable valuations, as they are now. Investors can get low-cost exposure to quality stocks through  iShares MSCI USA Quality Factor (QUAL) (0.15% expense ratio). This fund tracks an index that targets large- and mid-cap U.S. stocks with high returns on equity, low debt/capital ratios, and low variability in earnings growth over the previous five years relative to their sector peers. It weights its holdings according to both the degree to which they exhibit these characteristics and their market capitalization. This skews the portfolio toward stocks with durable competitive advantages.

In order to mitigate unintended sector bets, the fund recently switched from the MSCI USA Quality Index to the MSCI USA Sector Neutral Quality Index, which anchors its sector weightings to the broad market-cap-weighted MSCI USA Index. This change probably won't have a big impact on long-term performance, but it likely will increase turnover and transaction costs, which could detract slightly from the fund's returns.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.