The Quality Factor Shines Amidst the Artificial Intelligence Boom
The Quality Factor Shines Amidst the Artificial Intelligence Boom
The BMO MSCI Quality Index ETF suite (ZGQ, ZUQ and ZEQ) focuses on investing in high quality companies, defined by high return on equity, stable earnings that are less influenced by business cycles, and strong balance sheets with low leverage. Given these criteria, the composition of the Global and USA Quality indexes has been tilted towards the ‘Magnificent Seven’ – high quality growth names in tech such as Apple, Microsoft, and Meta — companies that are cash-rich, earnings growth machines. On the other hand, the sector composition is more balanced in Europe.
Funds
BMO MSCI All Country World High Quality Index ETF (Ticker: ZGQ)
BMO MSCI USA High Quality Index ETF (Ticker: ZUQ)
BMO MSCI Europe High Quality Hedged to CAD Index ETF (Ticker: ZEQ)
Quality Factor Features
- Long-term growth: Quality companies typically have low earnings variability, high margins and loyal consumer bases, giving them the capacity to invest heavily in growth projects and research and development.
- Reliable earnings: The Factor selects securities with solid fundamentals, stable earnings, and robust balance sheets, which can provide resilience during high market volatility.
- Lower risk profile: Despite being concentrated in more volatile sectors like Information Technology, the Quality Factor maintains lower risk profiles than Technology sector funds alone. The BMO Quality suite can also be seen as a ‘Medium’ risk method of accessing companies with high growth potential in popular sectors like Information Technology that would be otherwise rated ‘High’ risk on a standalone basis.
Quality Valuations Were Less Influenced by Long-Term Bond Yields in 2023
Because of its significant weighting in the Information Technology sector, the Quality suite did tremendously well in 2023. The surge in large-cap tech stocks — powered by investor optimism towards an artificial intelligence boom — helped the Quality factor outperform the broader benchmarks.
The ‘higher for longer’ mantra surrounding interest rates led to a surge in long-term yields that brought down the valuations of many other sectors in 2023, especially Utilities and Real Estate. Those sectors in particular can possess high leverage and have moderate earnings growth potential, two characteristics that Quality excludes.
ZGQ vs. MSCI ACWI Index
A comparison of the BMO MSCI All Country World High Quality Index ETF (ticker: ZGQ) clearly shows the relative outperformance that Quality experienced over the broader market.
ZUQ vs. MSCI USA Index
U.S.-based Quality similarly outgrew the wider market, as well, with the BMO MSCI USA High Quality Index ETF (ticker: ZUQ) outpacing the MSCI USA Index.
ZEQ vs. MSCI Europe Index
And again, Quality’s relative outperformance versus the broader market can be seen in Europe, where the BMO MSCI Europe High Quality Hedged to CAD Index ETF (Ticker: ZEQ) holds a long-term outperformance advantage.
Positioned for Long-Term Success
Quality is poised to thrive as large-cap technology names continue to play a pivotal role in the AI boom, and align with the Factor’s focus on stable earnings and robust financial health. In the evolving tech landscape, companies emphasizing innovation and efficiency, key features of Quality, are well-positioned for growth.
Additionally, in a high interest rate environment, the Quality factor also gains prominence by virtue of low leverage. As interest rates stay higher than historical norms, these companies are better able to weather economic uncertainties while continuing to invest in crucial research and development activities to grow.
Thus, investors prioritizing stability, risk management and strong financial fundamentals will find the BMO MSCI Quality Index ETFs – ZGQ, ZUQ and ZEQ – appealing for the long haul.
1 Standard performance data:
1-Yr |
3-Yr |
5-Yr |
10-Yr |
Since Inception |
|
ZGQ |
27.59% |
10.00% |
15.00% |
- |
13.45% |
2 Standard performance data:
1-Yr |
3-Yr |
5-Yr |
10-Yr |
Since Inception |
|
ZUQ |
33.71% |
13.74% |
16.94% |
- |
15.68% |
3 Standard performance data:
1-Yr |
3-Yr |
5-Yr |
10-Yr |
Since Inception |
|
ZEQ |
9.15% |
9.09% |
11.49% |
9.54% |
9.54% |
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