Keep The Quality And The Large Caps With This New ETF

The quality factor has long been one of the most studied investment factors and, thanks in part to exchange traded funds, it is also one of the most accessible. Access to ETFs focusing on the quality factor increased today with the debut of the FlexShares US Quality Large Cap Index Fund QLC. FlexShares is the ETF unit of Northern Trust Corp. NTRS.

Quality was originally used to gauge the financial sturdiness of dividend stocks because prodigious cash-generating ability and dependable, rising dividends are seen as hallmarks of the quality factor. However, application of the quality factor is evolving and that evolution includes how the factor is applied within ETFs. 

The FlexShares US Quality Large Cap Index Fund follows the Northern Trust Quality Large Cap Index, a benchmark “designed to measure the performance of a universe of large capitalization securities which demonstrate characteristics of better quality, attractive valuation and positive momentum,” according to FlexShares. 

Home to 120 stocks, QLC marries the quality, value and momentum factors while providing current income via dividend stocks while seeking to mitigate market risk. QLC's holdings are ranked by the quality, value and momentum factors.

“We examined legacy benchmarks and proxies and believed we could do better. We thought that a more robust starting universe would be advantageous if it allowed more dispersion in returns between companies with attractive factor exposures. Also, it would help limit concentrations in sectors with fewer qualifying constituents, such as telecom, utilities and materials,” said FlexShares in a research note. 

The new ETF allocates 21.2 percent of its weight to the technology sector followed by a 15.8 percent weight to financial services stocks. Health care is third at 12.9 percent. Six of QLC's top 10 holdings are members of the Dow Jones Industrial Average, including Apple Inc. AAPL, Exxon Mobil Corp. XOM, Pfizer Inc. PFE and UnitedHealth Group Inc. UNH. Apple, the largest U.S. company by market value, is QLC's largest holding at a weight of 4.9 percent. 

Although QLC is not an explicit dividend fund, an ETF genre FlexShares has previously found success with, the new fund's top 10 holdings are a mix of companies with lengthy dividend histories, such as Exxon, recently rapid dividend growth (Apple) as well as new members of the dividend club, such as Gilead Sciences Inc. GILD.

The weighted average market value of QLC's holdings is $102.8 billion. The new ETF charges just 0.32 percent per year, which is reasonable considering the fund's factor-driven approach.