Companies appear to be moving away from focusing on the quality investment factor. Some of the companies in question are good corporate stewards of their balance sheets. They throw off lots of free cash flow, have much more stable earnings than others, and are not as reliant on excessive leverage.
David Rosenberg, now of www.RosenbergReasearch.com, highlighted this divide in research notes released this week. He split the S&P 500 into credit rating tranches from top quality corporate credit (AAA) to junk (B). The difference between the two extremes is massive, and I believe it would be far worse if the U.S. Federal Reserve were not supporting many so-called “zombie companies” that do not generate sufficient funds to pay off their debts.
These companies are running on unsustainable footing. The business model only works because money is cheap. Rosenberg’s research predicts trouble ahead, predicting that the bankruptcy rates in high yield companies could easily be over 12 per cent before this cycle is over.
Investopedia says the quality investment factor is “defined by low debt, stable earnings, consistent asset growth, and strong corporate governance. Investors can identify quality stocks by using common financial metrics like a return to equity, debt to equity and earnings variability.”
This also fits with many of the Environmental, Social, and Corporate Governance (ESG) considerations as well.
There are a few ways to play the quality investment factor. Here are three ETFs that focus on this factor and are worth considering on this market correction we are seeing:
ZUQ BMO High Quality Index ETF
SPHQ Invesco S&P 500 Quality ETF
QUAL MSCI USA Quality Factor ETF
For a more global focus, BMO offers the pair below:
ZGQ BMO All Country World High Quality Index ETF
ZEQ BMO Europe High Quality (CAD-Hedged) ETF
Quality ETFs have outperformed the MSCI All World Index ETF by more than four per cent per year.
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