With the World Bank having recently cut its global growth forecast for 2014 to 2.8% from its earlier outlook of 3.2%, the need for better stocks with stronger fundamentals has become imperative for a portfolio.
Better or high quality stocks are expected to perform well given the sluggish economic picture and a general lack of investor confidence. Issuers are thus lining up products that focus on metrics like high quality or low volatility, or even products having both features (read: 'High-Quality' ETFs for Long-Term Outperformance).
In line with this trend, “quality ETFs” seem to be the mantra for the issuer State Street as well. The issuer has primararily focused on launching “Quality Mix ETFs” so far this year. Out of the 15 odd products launched by the issuer, including the recent 6 ETF launches, more than 50% of them have a quality theme.
The six new quality products from the shelf of State Street – SPDR MSCI Australia Quality Mix ETF (QAUS), SPDR MSCI Canada Quality Mix ETF (QCAN), SPDR MSCI Germany Quality Mix ETF (QDEU), SPDR MSCI Japan Quality Mix ETF (QJPN), SPDR MSCI Spain Quality Mix ETF (QESP) and SPDR MSCI United Kingdom Quality Mix ETF (QGBR) – focus on six different countries and have all hit the markets on June 11.
Each of these products is aimed at representing the performance of the equities markets in their respective countries with a focus on three factors – value, quality and low volatility.
Moreover, the underlying indices for these six products are an equal weighted combination of the MSCI Value Weighted Index, the MSCI Quality Index and MSCI Minimum Volatility Index, with each of the three indices representing their respective countries.
The products charge 30 basis points as annual fees across the board (read: Best ETF Strategies for 2014).
Below we have highlighted in details four of these funds:
Australia Quality - QAUS
The fund seeks to track the performance of the MSCI Australia Quality Mix A-Series Index, giving investors an exposure to a basket of 69 Australian stocks. The fund definitely has some concentration risk with its top 10 holdings forming a little under 60% of fund assets.
BHP Billiton LTD, Wollworths LTD and Wesfarmers occupy the top three spots each having more than 7% allocation in the fund. As far as sector exposure is concerned, Financials, Materials and Consumer Staples have the maximum exposure in the fund, with the rest of the sectors having just single-digit exposure.
Canada Quality - QCAN
Holding 95 Canadian stocks, the fund closely follows the MSCI Canada Quality Mix A-Series Index. However, QCAN has done a good job in spreading out its assets equally among individual stocks, though sector concentration still prevails. Financials and Energy occupy the lion’s share, with the duo capturing more than half of fund assets.
Germany Quality - QDEU
QDEU tracks the MSCI Germany Quality Mix A-Series Index holding 54 stocks. German stocks – BASF, Siemens and Deutsche Telekom – occupy the top three spots each having roughly 5% exposure in the index.
However, sector-wise, Consumer Discretionary has a huge one-fourth allocation in the fund, while Financials and Industrials draw up the remaining two spots in the top three (see Who Wins the 2014 World Cup of ETFs?).
The fund’s huge exposure to these cyclical sectors makes the performance of the fund highly dependent on the German economy.
Japan Quality - QJPN
The 268 stock fund looks to track the MSCI Japan Quality Mix A-Series Index. KAO Corp, NTT Docomo and Japan Tobacco are the top three holdings with Consumer Discretionary, Industrials, Financials, Consumer Staples, Information Technology and Health Care having double-digit allocation each in the fund.
How could they fit in a portfolio?
These ETFs could be an intriguing choice for investors willing to gain exposure to high quality stocks in the international markets. Moreover, with just 30 basis points as annual fees, these products are quite cost effective too.
Though the European Central Bank (:ECB) has recently announced to provide more monetary stimulus to its economy, the Fed has been gradually winding down its bond buyback program. With QE fading away, U.S. investors looking to gain global exposure might want to shift their focus to high quality companies.
Thus, these ETFs might somewhat quench investor thirst for better international stocks in basket form.
ETF Competition & Bottom Line
Products like PowerShares S&P 500 High Quality Portfolio (SPHQ), MSCI USA Quality Factor ETF (QUAL) and MSCI USA Value Factor ETF (VLUE) might pose a competitive threat to the above six products. Though that might be the case, the recently launched products might still manage to make room for themselves in this so called “Smart Beta” space.
This is especially true given that each of these new products provides exposure to quality stocks from different countries, while SPHQ, QUAL and VLUE focus only on stocks listed in the S&P 500 list.
Moreover, the new country-specific ETFs also seem to be complementary to State Street’s recently launched products which rather focus on three broad regions of the world – Europe, Australia and the Far East (:EAFE), emerging markets as well as global markets (read: Three Quality ETF Launches from State Street).
As such, we might see these newly launched products attracting more assets in the upcoming months and years from investors who want to have a quality touch to their portfolios.
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Read the analyst report on QAUS
Read the analyst report on QCAN
Read the analyst report on QDEU
Read the analyst report on QJPN
Read the analyst report on SPHQ
Read the analyst report on QUAL
Read the analyst report on VLUE
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