These 3 ETFs Hold High-Quality Stocks

These low-cost funds show that quality can come cheap.

Ryan Jackson 23.10.2023
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Quality investing seems too easy to work. At its core, it involves buying good companies: those with consistent profits, low debt, and overall healthy balance sheets. It should come as little surprise that these attributes bode well for the future, but the human urge to find the next rocket-ship stock can cause investors to overlook these wonderful opportunities.

Today, I’ll spotlight a trio of medalist ETFs that make no such mistake. All three are chock-full of high-quality stocks and have posted stellar long-term returns as a result.

3 High-Quality Stock ETFs

  1. Invesco S&P 500 Quality ETF (SPHQ)
  2. iShares MSCI USA Quality Factor ETF (QUAL)
  3. Vanguard International Dividend Appreciation ETF (VIGI)

Let’s start with Invesco S&P 500 Quality ETF. This strategy earns a Morningstar Medalist Rating of Silver and trades under the ticker SPHQ.

This index strategy ranks all S&P 500 members by a quality score that considers their return on equity, financial leverage, and balance sheet accruals. It sweeps in the highest-ranking 100 and weights them by the product of their quality score and market capitalization. This approach yields a portfolio of established companies with strong and stable cash flows, like Alphabet (GOOG), Mastercard (MA), and Exxon (XOM). In quality metrics like return on invested capital, this fund ranks near the top of the large-blend category.

SPHQ is not perfect. It turns over more than most peers and can look concentrated at times. But this fund’s quality tilt overshadows those drawbacks and helped it beat 95% of large-blend peers over the past decade. Plus, it only charges 15 basis points per year, testing the adage that quality doesn’t come cheap.

Cheap Wide-Moat Stock ETF

The next ETF on my list charges the same 15-basis-point fee. It’s Silver-rated iShares MSCI USA Quality Factor ETF, ticker QUAL.

Not only does QUAL have the best ticker for a quality fund but also one of the strongest approaches. This index strategy targets large- and mid-cap stocks with high profitability, low leverage, and stable earnings growth. The portfolio sweeps in the top-scoring stocks within each sector until it tallies 125 holdings. It also anchors its sector allocation to the broad large-cap market, which minimizes concentration and sector risk.

At the end of August 2023, stocks representing 73% of the portfolio had a wide economic moat—one of the highest rates in the large-blend category. Like SPHQ, it also ranks near the top in traditional profitability metrics. QUAL’s sector-neutral approach makes it slightly more volatile than SPHQ, but its returns have been excellent, ranking among the top 10% of large-blend peers over the 10 years through August 2023.

International Dividend Fund for a Low Fee

Rounding out today’s list is Vanguard International Dividend Appreciation ETF, ticker VIGI. It earns a Gold Medalist Rating due in part to its 0.15% expense ratio

The S&P Global Ex-U.S. Dividend Growers Index, which this fund tracks, absorbs foreign companies that have increased their dividends for at least seven consecutive years, eliminating the highest-yielding to promote stability. Stocks that make the cut are weighted by market capitalization and capped at 4% of the portfolio.

This fund doesn’t explicitly target quality stocks, but requiring seven straight years of dividend growth and removing the highest-yielding companies breeds a quality portfolio. So does market-cap weighting, as it pulls sturdy multinational firms like Novartis (NVS) and Nestle to the top of the portfolio. Like the other funds that explicitly target quality, VIGI consistently boasts stronger profitability metrics than most of its foreign large-growth category peers.

This sound investment process has translated into excellent results. VIGI beat its category index by over 1 percentage point annualized, with lower volatility, since its February 2016 inception.

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About Author

Ryan Jackson  is a manager research analyst, passive strategies, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers passive equity strategies.

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