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You often hear investors talk about looking for high-quality companies to invest in, but what does "high quality" mean in reality? There are different ways of defining quality, but BlackRock's (
NYSE:BLK
)
iShares MSCI USA Quality Factor ETF (
BATS:QUAL)
has its own criteria, and it uses this as the basis for its investments. How does it work, and has seeking quality paid off over time for investors?
What Does the QUAL ETF Do?
QUAL is a large $31 billion ETF from BlackRock’s iShares that invests in mid and large-cap U.S. stocks that “exhibit positive fundamentals, including high return on equity, stable year-over-year earnings growth, and low financial leverage.” Its underlying index is the MSCI USA Sector Neutral Quality Index
iShares says that QUAL screens for return on equity to find profitable companies, low earnings variability so that it is investing in stocks with stable earnings, and low debt-to-equity ratios to ensure that it is investing in stocks with low leverage. These all seem like sensible screens and good ways to weed out many of the market's lower-quality stocks.
QUAL's Holdings
QUAL’s purpose is to find and invest in companies with high-quality characteristics, so it’s no surprise that its portfolio is comprised largely of companies most investors typically think of as blue-chip stocks. The fund is very diversified and holds 126 different positions.
Holdings are capped at 5% and rebalanced semiannually to ensure that the fund remains sufficiently diversified. Furthermore, its top 10 holdings account for just 38.6% of assets. Below is an overview of
QUAL’s top 10 holdings using TipRanks’ holdings tool.
Nvidia (
NASDAQ:NVDA
) is the toast of the town in the investing world these days thanks to its key role in the rise of
artificial intelligence (AI), so it’s unsurprising that it's QUAL’s top holding with a weighting of 5.9%.
After Nvidia, tech giants Microsoft (
NASDAQ:MSFT
) and Apple (
NASDAQ:AAPL
), the two most valuable companies in the world by market cap, are QUAL’s next two largest holdings. However, QUAL isn’t simply a large-cap tech ETF -- within the top 10, you’ll also find healthcare companies like Eli Lilly (
NYSE:LLY
), global payment networks Visa (
NYSE:V
) and Mastercard (
NASDAQ:MA
), and even an oil major, ConocoPhillips (
NYSE:COP
).
Indeed, the fund is well-diversified across sectors, with the top sector, information technology, accounting for a 29.65% weighting, followed by healthcare (13.1%) and financials (11.74%). All other sectors have less than a 10% weighting. Information technology currently makes up a larger portion of the fund due to the rallies that its top holdings (tech stocks like Meta, Nvidia, Microsoft, and Apple) have seen in 2023.
BlackRock’s definition of high quality seems to correlate well with TipRanks’ Smart Scores. The
Smart Score is TipRanks’ proprietary quantitative stock scoring system. It gives stocks a score from 1 to 10 based on eight market key factors. The score is data-driven and does not involve any human intervention.
Eight of QUAL’s top 10 holdings have Smart Scores of 8 or above, led by Nvidia, which boasts a 'Perfect 10' rating.
QUAL stock itself has a Smart Score of 8 out of 10.
Another nice thing about QUAL is that while it focuses on blue-chip investments, it isn’t paying an egregious valuation for them. The ETF’s average price-to-earnings ratio is 17.8, which is actually a slight discount to the S&P 500.
Lastly, the fund deserves credit for its tax efficiency -- it has never had to pay a capital gains distribution over the years.
Dividend and Fees
QUAL pays out a dividend that currently yields 1.3%. This isn’t a dividend yield that really stands out in the current market environment, but it helps to add to total returns over time. The ETF also features a reasonable expense ratio of 0.15%.
Solid Past Performance
The efficacy of QUAL’s strategy seems to be borne out in its results. As of the end of the most recent quarter, it boasts double-digit annualized total returns over both a three and five-year basis, with annualized returns of 17.0% and 10.2% over each of those timeframes, respectively. Since its inception in 2013, the fund has returned a solid 11.6% on an annualized basis.
Is QUAL Stock a Buy, According to Analysts?
Analysts are relatively bullish on QUAL. It enjoys a Moderate Buy consensus rating from analysts, and the
average QUAL stock price target of $144.62 implies upside potential of 8.3%.
Of the 1,617 analyst ratings on QUAL, 61% are Buys, 33.3% are Holds, and 5.7% are Sells.
Investor Takeaway: Does Quality Matter?
You can't really argue with the type of results that QUAL has produced for its investors, and you could certainly have done a lot worse than investing in QUAL over the years with many of the other ETFs out there. Double-digit annualized returns over the long term are nothing to complain about.
On the other hand, despite its rigorous approach to screening for quality, QUAL's total returns are not all that different from those of a broad-market S&P 500 (
SPX
) ETF like the
Vanguard S&P 500 ETF (
NYSEARCA:VOO)
or the
SPDR S&P 500 ETF Trust (
NYSEARCA:SPY)
which both slightly outperformed QUAL over the same three- and five-year time frames.
As of the end of the most recent quarter, VOO posted total annualized returns over the three- and five-year time periods of 18.6% and 11.1%, respectively, while SPY had returns of 18.5% and 11% over the same periods. These ETFs both outperformed QUAL over the past three and five years despite their simple strategy of just investing in the S&P 500 without running additional screens for quality.
Further, the
Invesco QQQ Trust (
NASDAQ:QQQ)
, which invests in the Nasdaq 100 Index (
NDX
), has returned 19.8% and 15.7% over the past three and five years, respectively.
Below, you can
check out a comparison of these four ETFs using TipRanks' ETF Comparison Tool, which is customizable and allows users to compare up to 20 ETFs at once across a variety of factors.
None of this is to say that there is anything wrong with QUAL. It is a good ETF that has helped its investors to compound wealth over time. Past performance is no guarantee of future results, so it's also possible that QUAL could outperform these peers in the future. Additionally, QUAL's screens for low leverage and earnings consistency could help it to gain a leg up on the competition in the event of a recession.
However, It's just worth pointing out that there are other major, well-known ETFs that have generated even better results with less complex strategies. Note that VOO (0.03%) and SPY (0.09%) have lower expense ratios than QUAL, while QQQ comes in a bit higher (0.2%).
These ETFs also end up overlapping quite a bit, as the top stocks in QUAL's high-quality index are also among the largest S&P 500 and Nasdaq stocks by market cap, so the same names like Nvidia, Apple, and Microsoft account for large positions in all four ETFs.
Disclosure
Apple (
NASDAQ:AAPL
) stock recently hit a new all-time high, just over a week after the company unveiled its "spatial computer" to the world. Undoubtedly, it seemed like the Vision Pro announcement was a "sell-the-news" type of scenario, with shares sinking amid the keynote before eventually recovering.
I don't know whether it was the shocking price ($3,499), the lack of "killer" apps, a lack of overusing the word "AI," or the lengthy wait (it goes on sale in early 2024 in the U.S.) before fans can actually give Apple their money. Regardless, Apple's post-keynote reaction was somewhat muted, especially since the company delivered the new device that we've been waiting years for.
In any case, the headset reveal was on virtually everybody's radar, with many analysts that already factored in Vision Pro sales into their financial models before the keynote. Nonetheless, relatively low expectations have me very bullish on the stock, even near all-time highs.
Apple Vision Pro May Very Well be the Best Headset Yet
Understandably, VR and AR have struggled to take off thus far, and the headset market still has a haze of uncertainty clouding it. Not to mention a potential recession could curb demand for the first Vision Pro model. For years, the technology and pricing appeared to have held the field of spatial computing back from living up to its potential.
As Apple looks to take its shot in the space, I do think far too many people are over-curbing their enthusiasm when it comes to headset sales and the ability for visionOS (Vision Pro's operating system) to gradually take the place of tvOS, macOS, or even iOS. That's probably because there have been a lot of colossal flops when it comes to headsets over the years.
Many influential companies gave it their best shot and have failed to deliver. Still, this is Apple we're talking about. Apple is not a company that throws new ideas at a wall to see what sticks. It's also not one to jump on the bandwagon or chase hot trends that don't have the potential to generate considerable earnings growth over a reasonable timeframe. If it were a trend chaser, like so many firms seem to be these days, it would have shined more light on AI innovations.
Indeed, Apple can still innovate on the front of AI. It's just doing a better job of keeping the technical aspects behind the scenes. Further, Apple is all about safety and security when it comes to tech. It knows the dangers of unregulated AI and large language models (LLMs) in this early "wild-west" era.
The technology may be amazing, but if there's no clear view of risk and reward, it may prove wise to stick on the sidelines for now. In the AI era, there is no room for the "move fast and break things" mentality. That doesn't mean Apple won't join the "AI race" in the future, though, perhaps once regulators catch up. CEO Tim Cook is impressed by the technology and previously admitted to using ChatGPT himself.
Are Too Many Analysts Downplaying the Technology?
It's always a good idea to have modest or realistic expectations regarding emerging technologies. For instance, though Meta Platforms (
NASDAQ:META
) stock has more than doubled this year, it's more AI and social media to thank than the so-called
Metaverse or the Meta Quest headset.
Arguably, Meta's metaverse may be holding it back from rallying even more. Late last year, when Meta stock was in the gutter, billionaire tech investor Brad Gerstner wrote an open letter to Meta asking for less cash to be poured into metaverse bets, among other requests.
As VR and AR technology evolve, I do believe analysts could be caught revising to the upside in a few years after demand shows to be far better than expectations. Only time will tell if Vision Pro is a mass-market device that everyday Apple users will buy or plan to buy once they can afford to.
Regardless, I believe there's a good chance that the demand could crush estimates in a year. Yes, $3,499 is not cheap, but as the app library grows alongside consumer savings (they have a year or so to save up), don't count me as surprised if Apple struggles to keep up with demand 18 months down the road.
Wedbush's
Daniel Ives is a long-time bull on Apple stock. He recently hiked his price target on AAPL from $205 to $220. Ives stated that Apple is "playing chess while others play checkers," also calling Vision Pro a "revolutionary product."
Despite this, he sees just 150,000 units selling in the first year and 1 million in the second. Personally, I think first-year unit sales could easily pass 1 million, and if that's the case, Ives and other analysts may have a few more upgrades up their sleeves.
Is Apple Stock a Buy, According to Analysts?
Turning to Wall Street, AAPL stock comes in as a Strong Buy. Out of 29 analyst ratings, there are 22 Buys and seven Holds.
The
average Apple stock price target is $189.17, implying upside potential of 2.3%. Analyst price targets range from a low of $149.00 per share to a high of $210.00 per share.
The Bottom Line on Apple Stock
Apple stock is trading at a historical premium at 31.5 times trailing price-to-earnings. Despite this, I still view AAPL stock as a bargain. Vision Pro sales estimates vary among analysts, but most may be heavily underestimating demand. As such, I'm sticking with the stock as it inches closer to $3 trillion territory.
Disclosure
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