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Keep The Quality, Lose Lower Rated Names With This Nifty ETF

July 23, 2020 9:16 am
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Keep The Quality, Lose Lower Rated Names With This Nifty ETF

Once again, the quality factor is delivering for investors, providing support to exchange-traded funds, such as the Direxion S&P 500 High minus Low Quality ETF (NYSE:QMJ).

What Happened

QMJ debuted in February, bringing a fresh approach to prosaic quality factor ETFs. Rather than simply focusing on quality stocks, QMJ overweights those names while shorting a group considered to be low quality. Quality Minus Junk, hence the ticker “QMJ.”

Up 17.32% over the past 90 days, QMJ is proving to be one of the best of 2020's rookie ETFs when it comes to performance.

“In uncertain times, investors continue to gravitate toward healthy US companies with strong balance sheets, low debt and high relative profitability,” said FTSE Russell managing director Philip Lawlor in a recent note. “And, as the COVID-19 recovery story started to lose some of its luster—or at least its immediacy—in June, the short-lived outperformance in the Size factor waned. Adding additional support to this story, Quality has benefited from its relative overweight to the technology and healthcare sectors and significant underweight to financials while Profitability was strengthened in the second quarter by balance sheet accruals.”

Why It's Important

QMJ has a 150% long exposure and a 50% short basket that nets out to 100%. As such, the Direxion fund is heavily overweight technology to the tune of 50.26% followed by healthcare – another staple of quality ETFs – at 30.49%.

What makes QMJ's 2020 performance all the more impressive is that it's short some high-flying stocks. For example, its top two short positions are Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) – two of the S&P 500's best-performing names this year.

Shorting those names is obviously risky, but it shows the potency of QMJ's quality profitability combination.

What's Next

“Quality and Profitability leadership held strong through the Q2 risk rally, as Low Volatility took the brunt of the rotation into Size and (less so) Value,” notes Lawlor. “With the rally fading in June, the gulf between US defensives and riskier factors remained wide.”

On a standalone basis, quality is the leading factor this year followed by profitability. Both are ahead of long-term momentum where the likes of Amazon and Netflix reside.

As for what QMJ excludes, which is also of importance to investors considering the fund, there's no long exposure to the financial services, real estate and utilities sectors.


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