Get an "Edge" with this Quality Factor ETF

07/26/2019 5:00 am EST

Focus: ETFS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

In rating more than 1,200 equity ETFs, CFRA Research combines proprietary holdings-level analysis with fund attributes, such as its expense ratio and technical trends, notes CFRA Research analyst Todd Rosenbluth in The Outlook.

The CFRA Focus ETF for July is iShares Edge MSCI USA Quality Factor ETF (QUAL). Given the current environment, with moderate US economic and earnings growth projections for the remainder of 2019, a focus on quality is appropriate.

Though slowing, the U.S. economic expansion will likely continue to remain in force. CFRA Chief Investment Strategist Sam Stovall believes the low trajectory since its beginning in June 2009 has allowed the economy to remain aloft for longer than normal. As of July, this expansion will become the longest in history.

Action Economics (AE) expects U.S. real GDP to see a slight slowdown in growth in 2019 to 2.7% from the 2.9% increase for 2018, helped by a 2.6% gain in 2019 for personal consumption and a 4.0% rise in personal income propelled by a continued slide in unemployment to 3.6%. Finally, AE thinks the risk of U.S. recession remains low.

Meanwhile, according to S&P Capital IQ consensus estimates, the S&P 500 should post an increase in operating EPS of only 2.2% in 2019, due to extremely difficult year-over-year comparisons with the tax cut-supported results of 2018. EPS growth is then seen rising by 11.7% in 2020, which should also be accompanied by double-digit EPS increases in the developed and emerging economies.

Also, while five of 11 sectors in the S&P 500 are projected to post year-over-year EPS declines in 2019, all are seen rising in 2020, led by energy, materials and tech. The smallest gains are expected for the consumer staples, real estate and utilities groups.

The iShares ETF we highlight this month holds large- and mid-cap stocks that exhibit high return on equity, stable year-over-year earnings growth and low financial leverage, according to index provider MSCI. While valuation is not part of the construction criteria, six of QUAL's top-10 holdings are CFRA Strong Buy or Buy recommendations.

CFRA Equity Analyst Chris Kuiper has a Buy recommendation on Visa (V) due to the Information Technology company’s healthy growth from digital and mobile payments.

He expects revenues will increase 11% annually through FY 21 (Sep.), coupled with margin expansion and stock repurchases helping to drive high-teens earnings growth. In addition, V has an above-average S&P Quality Ranking of A- due to its strong historical earnings and dividend growth record.

CFRA Equity Analyst Camilla Yanushevsky also has a Buy recommendation on Nike (NKE) and expect sales to rise 8% in FY 20 (May), reflecting consumers' continued excitement about NKE's robust innovation pipeline in footwear and apparel.

With expectations of margin expansion and continued share buyback activity, CFRA expects a 14% compounded annualized growth of earnings per share in the next three years. NKE has an above-average Quality Ranking of A.

Other top-10 holdings include Apple (AAPL), Facebook (FB), PepsiCo (PEP) and Walt Disney (DIS), although CFRA’s rating is driven by analysis of the full 127 holdings.

At the sector level, Information Technology (22% of assets), Health Care (14%), Financials (12%), Consumer Discretionary (10%) and Communications Services (9%) highlight the diversity the portfolio provides.

At the ETF level, CFRA views QUAL’s modest 0.15% expense ratio favorably and believes the fund is trading with bullish technical trends, as it remains above the 200-day moving average.

Average daily volume has increased in June, with 1.6 million shares trading, above the 1.4 million in the first half of 2019. Year-to-date through June 26, QUAL added $2.2 billion of net inflows and had $10 billion in assets.

Subscribe to CFRA Research's The Outlook here…

Related Articles on ETFS

Keyword Image
The Best Way to Play IPOs
10/29/2019 5:00 am EST

I’d hate to be a startup CEO going into the market to raise money these days, mostly because i...