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Summary This ETF has a lower expense ratio than I would have predicted for fundamental weighting. The individual holdings look fairly appealing. I was concerned about the presence of a “fundamental weighting” strategy, but I can’t argue with the holdings. The sector allocations are remarkably similar to a total market ETF ran by the same sponsor. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds that I’m researching is the iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio for QUAL is only .15%. I tend to be very frugal with my expense ratios, so I like to see those low levels. When I’m looking at a simple market cap weighted broad market or total market ETF I would expect to see single digit expense ratios. I’m not saying that fundamental weighting strategies are inherently superior, but I sure don’t mind seeing a strategy that is different from the typical market capitalization weights. Comparing this only to other ETFs that are using fundamental weighting strategies, the expense ratio feels fairly reasonable. Largest Holdings The following chart shows the largest holdings for the fund: (click to enlarge) While I’m not entirely sold that fundamental weighting strategies are the perfect answer, I can’t argue with the portfolio produced by those strategies. I’m looking at this portfolio and I see quite a few companies that I like to see in the top holdings. Microsoft Corp. (NASDAQ: MSFT ) is the top weighting and it gets a fairly heft allocation with more than 5% of the portfolio. I’m not huge on Microsoft because I was hoping to be blown away by Windows 10. My machines are still running Windows 7. I don’t want the latest product at a price of “Free upgrade”, which concerns me. On the other hand, I’m still using their operating systems on all of my computers and have not even considered changing, so that is a highly favorable sign. Going down the other holdings I see several companies that I love to see with heavy weights. Johnson & Johnson (NYSE: JNJ ) is an incredible dividend aristocrat and a leader in the health care sector. I’d like to have that kind of exposure so that higher profit margins for the health care sector would at least lead to higher dividends for me to offset higher prices on the products I would need to buy. I’m a little surprised that Wal-Mart (NYSE: WMT ) is not on the list after their share prices fell so hard. Margins are razor thin in the retail industry but if the ratios included price as a factor I would think WMT would get a nod. One very interesting choice in here is Monster Beverage Corp (NASDAQ: MNST ). I am a big fan of Monster and I think they may regularly be undervalued because of the target market for their product not matching up with the section of the population that will own the majority of the stock market. Monster is a young brand. With Coca-Cola Company (NYSE: KO ) helping Monster grow the brand I expect Monster to have some solid international growth. I just wouldn’t expect Monster to still be on this chart after their price soared after Coca-Cola announced their acquisition of part of the company. Sectors The following chart breaks down the allocation by sector: This allocation is interesting to me because it is remarkably similar to the sector allocation of another ETF ran by the same parent company. Below I have a chart of the sector allocation for the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ). Interesting similarity huh? I would expect that similarity in funds that were simply using market cap weighting, but it is interesting when the fund is using a fundamental weighting. Note that the individual company holdings are substantially different between the two funds, it is just the sector allocations that are remarkably similar. Conclusion I haven’t been entirely sold on the system of fundamental weightings since it suggests that a simple computerized model of large companies would be outperforming the market as a whole. I have a hard time swallowing that pill and prefer to use a somewhat defensive equity allocation for my index funds while focusing my individual security selection on very small companies in sectors that have seen severe market failings because I believe it will be easier for me to beat the market there. Despite my not being entirely sold on the system, the expense ratio isn’t bad and the system produced a group of very respectable companies to lead the portfolio. Over the years I may find my opinions on factors like fundamental weighting to be shifting given the companies that were selected. Scalper1 News
Scalper1 News