It is no mystery to anyone that we have entered a period of inflation. An intensive and lasting inflation, driven by energy and commodity prices (or transitory, if we stick to the position of central banks). The governor of the French central bank stated on a radio station that this "phenomenon that is focused on energy and certain goods and products" which will "fall back below 2% on an annual basis by the end of next year". This surge in prices is likely to temporarily depress business performances. It is therefore naturally more reassuring to look into candidates capable of withstanding these price increases without seeing their earnings slashed, at the risk of crumbling into dust.
US Consumer price index 12-month percent change. Source US Bureau of labour statistics
Because of the rise in prices affecting consumers and companies, it would be wise to look at ETFs based on the MSCI World Quality Index. This index is a subset of stocks from the MSCI World (23 most developed countries), selected for their quality finances and stable results. The selection is based on these three criteria:
- high return on equity (ROE)
- stable growth over the last few years
- low financial leverage (debt/ebitda ratio)
By skimming the MSCI World, we obtain a total of 298 quality companies that provide above-average earnings security, making them - theoretically - less sensitive to multiple market shocks.
The MSCI World Sector Neutral Quality Index is a derivative of the World Quality Index and provides sector diversification in the selection of companies. Rather than selecting the best companies across all sectors, the Sector Neutral Quality Index is composed of the best companies in each of the eleven sectors listed in the GICS (Energy, Materials, Industrials, Consumer discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, Utilities and Real Estate). The Sector Neutral version gives less weight to Information technology stocks than the traditional index (22.52% vs. 38.75%) and more to Financials (13.7% vs. 4.82%) and Consumer Discretionary (12.06% vs. 5.13%)
Sector breakdown of the MSCI World Quality Index (left) and MSCI World Sector Neutral Quality Index (right) Source: MSCI documentation
International investing: iShares MSCI Intl Quality Factor ETF (M1WOUNQ)
This ETF based on the MSCI World ex USA Sector Neutral Quality Index has been implemented on Jan 13, 2015. It is managed by BlackRock, the world's largest asset manager with more than $9,000 billion in assets under management.
The chosen ETF chosen adopts an accumulation strategy, which means that the interests and dividends are reinvested in the ETF.
Its performance is almost +83% since its inception, which is equivalent to an annualized return of roughly +9,2%. Since January 1st, 2021 its return is +13%.
The portfolio allocation is an optimized version of the replicated index. The major holdings of this ETF are:
- ASML Holding NV 4,7%
- Roche Holding Paar AG 3,88%
- Nestle SA 3,57%
- Novo Nordisk Class B 2,85%
- AIA Group LTD 1,88%
- Wesfarmers LTD 1,61%
- TC Energy Corp 1,58%
- Allianz 1,53%
- Unilever PLC 1,47%
- Hong-Kong Exchanges and Clearing Limited 1.44%
Its top 10 geographic exposure is as follows:
- Japan 15,09%
- UK 14,55%
- Switzerland 12,97%
- Canada 8,53%
- Netherlands 6,36%
- Australia 5,92%
- France 5,56%
- Germany 5,48%
- Denmark 5,43%
- Hong Kong 5,12%
Total performance of our ETF (IQLT) since Jan 2015 Source: iShares website
US Investing: iShares MSCI USA Quality Factor ETF (M2USSNQ)
This ETF has the same basis as the preceding one, only it is exclusively composed of US stocks.
Its performance since the launch in Jul 16, 2013 is roughly +230% or +15,5% in annualized return. Since January 1, 2021, we get a spectacular return of +28%.
The main positions are:
- Meta Platforms Inc Class A 4,20%
- Microsoft Corp 3,94%
- Nvidia Corp 3,92%
- Nike Inc Class B 3,89%
- Apple Inc 3,42%
- Blackrock Inc 3,04%
- Johnson & Johnson 2,73%
- Target Corp 2,61%
- Alphabet Inc Class A 2,58%
- Alphabet Inc Class B 2,55%
Total performance of our ETF (QUAL) since Jul 2016 Source: iShares website