Over the last decade, it hasn’t been particularly hard to beat the FTSE 100 index.
It’s been difficult to outperform the S&P 500 however, as it’s soared due to big gains from mega-cap tech stocks.
There are some products that have managed to beat the S&P over this timeframe though. Here’s a look at one exchange-traded fund (ETF) that’s generated higher returns than the US index.
Beating the S&P 500
The fund in focus is iShares MSCI USA Quality Factor ETF (NYSEMKT: QUAL) This is an ETF that focuses on stocks in the US market that screen up as high quality.
What do I mean by high quality? Well, specifically, it focuses on companies that have:
- A high return on equity
- Stable year-on-year earnings growth
- Low financial leverage
The top five holdings at the end of July were Nvidia, Apple, Microsoft, Visa, and Mastercard.
In terms of performance, this ETF produced a return of 13.36% a year over the 10-year period to 31 July. That compares to a return of 13.11% a year for the iShares S&P 500 ETF (and 6.1% for the iShares Core FTSE 100 UCITS ETF).
So the focus on quality paid off. It’s worth noting here that quality’s one of the major factors that investors can focus on when investing in stocks. Some others are value, growth, size, and momentum.
How UK investors can gain exposure
Now the bad news. This exact ETF isn’t available to UK investors as it’s a US product. The good news however, is that there’s a UCITS version of the fund that is available. This is the iShares Edge MSCI USA Quality Factor UCITS ETF (LSE: IUQA).
In terms of portfolio construction and holdings, this ETF’s pretty much identical to the product I mentioned above (the top five holdings at the end of July were exactly the same).
It just doesn’t have a 10-year performance figure. That’s because it was only launched in 2016.
If the iShares MSCI USA Quality Factor ETF was to continue outperforming the S&P 500 though, I’d expect the iShares Edge MSCI USA Quality Factor UCITS ETF to do the same (in GBP terms).
Ultimately, it’s nearly identical to its big brother.
A good core holding?
I’ll point out that looking ahead, I’m not expecting this ETF to outperform the S&P 500 all the time.
While high-quality stocks tend to perform pretty well over the long term, there are going to be periods when they underperform.
For example, they sometimes lag the market when there’s a rush into lower-quality cyclical stocks.
One other thing to be aware of with this product is that its fees are slightly higher than those of the basic iShares S&P 500 tracker. The total expense ratio’s 0.2% versus 0.07% for the iShares Core S&P 500 UCITS ETF (it’s still very cheap).
Overall though, I think it’s a lot going for it. For those looking for a solid core portfolio holding, I think this ETF’s worth considering.
