An ETF Play For Quality Stocks At A Fair Price

Items viewed as high quality usually sport higher price tags than their lower quality counterparts. The same is true in financial markets.

While it is widely expected that growth, momentum and — sometimes — low volatility stocks trade at valuations that are high relative to broader benchmarks, the same is also true of the quality factor. It's the price investors pay to get involved with companies that usually have strong dividend track records and healthy balance sheets, among other positive traits.

What Happened

The O'Shares FTSE U.S. Quality Dividend ETF OUSA is a solid option for income investors looking to tilt toward quality stocks. The exchange traded fund, which turns three years old in July, tracks the FTSE USA Qual/Vol/Yield 5% Capped Factor Index. OUSA has proven popular with investors, as highlighted by its $437.4 million in assets under management.

The index “is designed to measure the performance of publicly listed large-capitalization and mid-capitalization dividend-paying issuers in the United States that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds,” according to O'Shares.

Why It's Important

OUSA is worth a look in the current environment because data suggest quality stocks are not as richly valued relative to broader indexes as they usually are. Quality stocks historically trade at a 20-percent premium to the S&P 500, but OUSA is nowhere close to that level today.

Using OUSA's underlying index as the barometer, quality stocks only trade at a 9-percent premium to the S&P 500, meaning that is the cheapest quality names have been since 2009, according to O'Shares data.

Eight of OUSA's top 10 holdings are members of the Dow Jones Industrial Average, including Exxon Mobil Corp. XOM and Johnson & Johnson JNJ.

What's Next

With interest rates rising, high-yield dividend sectors and strategies could face continuing pressure. OUSA could benefit as investors adjust their exposure to dividend stocks and embrace higher quality names over rate-sensitive, yield-based funds.

Industrial and consumer staples stocks combine for over 30 percent of OUSA's weight while technology and health care names combined for 27 percent.

OUSA has a trailing 12-month dividend yield of 2.41 percent.

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