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ETF Specialist

The What, Why, and How of Quality

Quality may or may not stand on its own, but it seems to bring out the best in value stocks and small caps.

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A version of this article was published in the February 2016 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.

Quality may be the fuzziest factor you will find in the investing world. There is no one agreed-upon definition for it, nor is there clear consensus that it is a true stand-alone factor. What's more, it is missing the risk story, the basic economic intuition, and the readily discernible behavioral underpinnings that explain the existence and persistence of the value factor. Here, I'll address what quality is, why it may or may not yield superior risk-adjusted returns, and how investors can harness it with exchange-traded funds.

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Ben Johnson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.