Investors are betting on this high-quality ETF and beating the market

Published Mon, Apr 24 202310:14 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Economic worries can often lead Wall Street strategists to predict a "flight-to-quality," and many investors appear to be taking that wisdom literally in recent months. The iShares MSCI USA Quality Factor ETF (QUAL) has emerged as the most popular ETF in the U.S. this year. The fund has raked in more than $2 billion of inflows over the past month to bring it to nearly $8.5 billion for the year, the most for any ETF, according to FactSet. The fund now has $28 billion in total assets under management. The bets have been a winning strategy for investors so far, with a 9.9% total return year to date, compared with 8.2% for the SPDR S & P 500 Trust (SPY) . Quality is one of the most widely used labels in factor investing. The iShares ETF screens for return on equity, earnings consistency and companies with low debt-to-equity ratios. That approach has resulted in a fund that owns several of the best performing large cap stocks this year. The fund's top holding is Home Depot , but it has a heavy weighting in tech names like Meta Platforms , Nvidia and Apple . Tech stocks make up more than 21% of the fund, according to iShares. Financials and health care are the next two top sectors, it said. The QUAL ETF has an expense ratio of 0.15% and a three-star rating from Morningstar. Other notable quality ETFs include the JPMorgan U.S. Quality Factor ETF (JQUA) and Invesco S & P 500 Quality ETF (SPHQ) . Both have seen inflows this year, but have lagged the QUAL fund. The JPMorgan ETF has returned 7.6% year to date, while Invesco's fund has returned 8.9%. The differences in performance might be due in part to varying definitions of quality. "Quality is one of the factors where there's less of a consensus of what is quality," said Mark Barnes, head of investment research at FTSE Russell. "… Quality has something to do with safety generally, or how good a stock is. It's usually related to the robustness of the stock to different types of shocks. Some people look at earnings volatility. A lot of times profitability is a component of it." FTSE Russell uses profitability and leverage metrics to define quality stocks, Barnes said. By that measure, quality stocks outperformed in every major market in the first quarter except the U.K., which has less of a tech sector. With U.S. economic indicators weakening and Federal Reserve officials signaling that the central bank is not done with rate hikes, the trend is toward quality staying power in the months ahead, according to Gargi Chaudhuri, head of iShares investment strategy Americas. "Slowing growth amid still-high interest rates creates a challenging investment environment for equity investors, and we remain broadly underweight. However, companies that have historically done well in this environment are those with high returns on capital, margin stability, and solid balance sheets with reasonable valuations," Chaudhuri said in a note to clients last week.