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A Low-Cost ETF With a Focus on Strong Businesses

Alex Bryan, CFA

Alex Bryan: iShares Edge MSCI USA Quality Factor ETF is a compelling, low-cost fund that should offer better risk-adjusted performance than the market over the long term.

This Silver-rated strategy invests in great businesses. It targets large- and mid-cap U.S. stocks with the best profitability, strongest balance sheets, and most consistent earnings growth relative to their sector peers. This sector-relative approach to stock selection leads to cleaner comparisons, but it can also cause the fund to own stocks with lower absolute quality characteristics than it otherwise would.

To further mitigate unintended sector bets that might otherwise creep into the portfolio, the fund matches its sector weightings to those of the broad market. These adjustments effectively reduce its exposure to tech stocks, and increases its exposure to energy and utilities stocks.

The portfolio favors stocks with durable competitive advantages, like Starbucks, 3M, and Facebook. These stocks often carry above-average valuations, which tends to give the fund a growth tilt.

This strategy has tended to hold up a little better during downturns than most, but it has lagged a little during strong market rallies. Still, since its inception in July 2013 through the end of January, it beat the MSCI USA Index by 25 basis points annually. 

Its low 0.15% fee and focus on strong businesses give it a good chance to continue offering a favorable risk/reward profile over the long term.