Rethink U.S. Large-Cap Exposure With This ETF

Finding exchange-traded funds that track U.S. large-caps is not difficult. Indeed, U.S. large-caps are the most easily accessed asset class via ETFs. However, with so many funds offering exposure to the same asset class, parsing through the good and the bad is a dizzying task.

Increasingly, new large-cap ETFs wear the smart or strategic beta label, and a growing number of those funds are multi-factor ETFs. Some investors prefer to isolate factors such as low volatility, momentum and quality, and there are plenty of ETFs that oblige. The quality factor has long been one of the most studied investment factors and, thanks in part to exchange-traded funds, it is also one of the most accessible.

Looking At QLC

As its name implies, the FlexShares US Quality Large Cap Index Fund QLC focuses on the quality factor. QLC can be alternative to traditional large-cap funds, as its methodology is “based on quality, value and momentum factors. Exposure to the factors is optimized, with sector, style and security level constraints, to maintain a similar risk profile to the original universe,” according to FlexShares.

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The FlexShares US Quality Large Cap Index Fund follows the Northern Trust Quality Large Cap Index, a benchmark “designed to measure the performance of a universe of large capitalization securities which demonstrate characteristics of better quality, attractive valuation and positive momentum,” according to FlexShares.

Holdings And Allocations

QLC holds 127 stocks and the top 10 holdings confirm the ETF's marriage of the quality, value and momentum factors, as Apple Inc. AAPL, Exxon Mobil Corporation XOM and Gilead Sciences, Inc. GILD reside among the top.

Quality, Seen A Bit Differently

What makes QLC a potentially potent addition to a portfolio is how FlexShares defines quality. That definition includes searching for companies with efficient management teams, high profitability and robust cash flow. Including Apple, several of QLC's top 10 holdings are among the most cash-rich U.S. companies.

“Targeting undervalued companies that exhibit financial strength also provides a strong foundation on which to build an investment strategy. However, by utilizing market-sensitive data (not just company-reported data), the model may be further improved to help avoid value traps. We use momentum to measure the market sentiment for the company as it is reflected in the stock’s price,” said FlexShares.

QLC's largest sector allocations are 20 percent to technology and 15.6 percent to financial services. Healthcare, consumer staples, consumer discretionary and industrials also garner double-digit weights.