Not All Quality ETFs are Created Equal

This isn't the time in the cycle to take excessive risk. The easy money has already been made. Astoria's 2019 playbook is as follows: late cycle economic forces + desynchronized global growth + a deteriorating earnings cycle = the need for more defensive posturing across stocks and bonds.

Astoria has been vocal about owning higher quality stocks in 2019. Why? Companies with above average ROE/ROA and increasing profitability should be rewarded in an environment when earnings are declining.

Second, higher quality stocks have historically outperformed lower quality stocks (see chart below). Since 1963, the highest quintile of U.S. profitable companies has returned 11.63 percent while the lowest quintile has returned 7.79 percent. Higher quality companies have also outperformed the market which returned 10.30 percent over this time-period.

Source: Kenneth French Data Library, with data as of 12/31/17, WisdomTree. Period based on the availability of operating profitability returns sorted into quintiles, beginning 6/30/63. The universe is U.S.-listed equities grouped based on operating profitability. Past performance is not indicative of future results. Sharpe Ratio: Measure of risk-adjusted return. Higher values indicate greater return per unit of risk, specifically standard deviation, which is viewed as being desirable.

There are some key differences amongst Quality ETFs. Utilizing quantitative portfolio construction tools and aggregating the underlying fundamentals to determine the optimal ETF for your portfolio is crucial.

The key message from Astoria is to pick high quality stocks with strong balance sheets which have demonstrated the ability to grow their earnings regardless of the prevailing macroeconomic conditions. We find that DGRW (WisdomTree US Quality Dividend Growth ETF) and QUAL (iShares Edge MSCI USA Quality Factor ETF) have relatively higher factor loadings and have more balanced sector weights compared to some of the other larger Quality ETFs.