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He looks at the returns and volatility for higher quality vs lower quality in US stocks, high-yield (BB vs CCC) bonds, small cap stocks, global stocks and value stocks.As GMO launches its first ETF, it seemed like a good time to share my thoughts on the market inefficiency that the strategy seeks to exploit – the quality anomaly. The basic goals of any active investor are to achieve higher returns and/or lower risk than a passive portfolio. These goals are, or at least should be, in conflict with each other. If financial markets were efficient, it would be impossible to sustainably achieve higher returns without taking on additional risk. And any portfolio that embodied lower risk would pay for it with lower long-term returns. At the highest level, markets basically work this way. Government bonds and cash are lower risk than high yield bonds and equities and have delivered lower returns across almost all markets and most time periods. But within risk assets, things get weird. Within both stocks and high yield bonds, you have historically been able achieve both higher returns and lower risk by owning the highest quality securities in those universes. This quality anomaly has been around for a long time and exists within multiple subsets of the equity universe. And for what it is worth, their opposite numbers have also been mispriced – low-quality stocks and CCC (and below) bonds have underperformed their broad universes despite their obviously greater downside in bad economic times. In an investing world where most trade-offs are difficult, this one is pretty easy. If you were going to have one permanent bias in your equity and high yield bond portfolios, it should be in favor of high quality.
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"If you were going to have one permanent bias in your equity and high yield bond portfolios, it should be in favor of high quality." (Underline added)
I own Quality in my portfolio in the hope to lower volatility of my portfolio without decreasing total returns over a long period of time. I think Quality performs by losing less in a down market. Over shorter periods, SPY total return can beat Quality.
dAnd how does one define quality in equities and bonds? Is it the way we understand pornography, we know it when we see it?
Maybe it's quality junk?
cra . . .crummiest assets they can find?GMO's statement of quality (as it applies to QLTY):
"The GMO U.S. Quality ETF seeks to generate total return by investing in U.S. equities the Focused Equity team believes to be of high quality.
The team believes that companies with established track records of historical profitability and strong fundamentals – high quality companies – are able to outgrow the average company over time and are therefore worth a premium price. The GMO U.S. Quality ETF’s disciplined approach uses both quantitative and fundamental techniques to assess the relative quality and valuation of U.S.-domiciled companies and aims to exploit a long-term investment horizon while withstanding short-term volatility in an actively managed ETF format." Source
As of this morning, I find 54 US equity funds in the MFO premium database with quality in their name, in addition to QLTY. And many of them charge less than QLTY.
So I am amused by the pitch that GMO alone, has discovered, and can identify, a quality premium.
Likewise I have no clue where your statement "So I am amused by the pitch that GMO alone, has discovered, and can identify, a quality premium." comes from. I didn't find that in GMO's literature.
Inker's marketing wryly amuses me. I'm amused he thinks quality is anomalous. I'm amused when he compares stocks to battleships. I'm amused he can't find paragraph breaks. My amusement is not worth beating to death with semantics.
Maybe someday I'll even by QUAL, if it ever gets ahead of TCAF.
The Invesco S&P MidCap Quality ETF (Fund) is based on the S&P MidCap 400 Quality Index (Index). The Fund will invest at least 90% of its total assets in the component securities that comprise the Index. The Index is a modified market capitalization weighted index that holds approximately 80 securities in the S&P Midcap 400® Index that have the highest quality scores, which are computed based on a composite of three proprietary factors. The Fund and the Index are rebalanced semi-annually.
I guess S&P own the recipe to the secret sauce. They don’t appear to want you and me to know what the three proprietary factors are. I suspect further research into « quality » funds will prove equally frustrating.
According to etf.com this is the secret sauce:
I agree that GMO is an annoying marketing machine. As I mentioned elsewhere, it was ballsy for them to not seed their first ETF - their overconfidence of their ability to market speaks for itself. It started with $3M AUM and got up to $30M as of yesterday (50% increase probably yesterday). The lumpy inflows could have a negative short term impact for existing shareholders.
I have always ignored their public pronouncements. I would not have bought QLTY (an active fund) if we did not have GQETX to look at past performance. If the fund stopped performing against another Quality fund (passive or active), then it is reasonable to bail but comparing it to SPY or other active funds on a short to intermediate term basis may just be a point of entertainment. I think it is fair to compare any investment over one's investment horizon. It is also fair to question whether a retail investor (such as us) should really delve into specific factors.
As I mentioned earlier in this thread, expect Quality to give lower returns when high Beta (or other factors) are in vogue. Also, with only 35 constituents, QLTY returns could be a bit lumpy just as with any focused fund but GQETX returns do not appear to be lumpy - active management?
I would just sit and watch until the fund gets to a reasonable size AUM.
I think posters in this thread raised good points, even if a bit salty! I think it is good when others take the time and effort to question what one is doing. Thanks.
Do you mind elaborating why you would prefer FMIMX over XMHQ?
Other than in 2022, an unusual set of circumstances, XMHQ seems to have done well.
While I do not generally pay attention to ER, I think you mentioned elsewhere and so I checked. XMHQ ER 0.25% while FMIMX ER is 1%.
Just ran one of my screens at MFO Premium and XMHQ is looking good since Covid (2020/01). OTOH, FMIMX looks good since TGN (2022/01). It's one of a very few SMID funds with a positive Martin ratio number since then.
So it will come down to the risk and volatility numbers going forward. I'm not sure what longer-dated past performance numbers have to say about the environment we are in now, or the one that we may be entering.
As for the price? What else? I like their marketing.
I think XMHQ in a taxable account makes good sense (you had mentioned this), given how tax efficient it has been.
I had not previously owned a small or mid cap ETF before.