What are we looking for?
Equity exchange-traded funds – with the focus on quality and low volatility characteristics.
As market volatility continues, investors looking to err on the side of caution might find some ideas in today’s screener, which leverages Morningstar’s holdings-based Factor Profile methodology for funds. As an evolution of the Morningstar Style Box, it includes seven factors that are widely accepted in the industry as reliable descriptions of the underlying drivers of market performance: size, style (or value versus growth), quality, yield, liquidity, volatility and momentum. Each factor is scored for a fund based on analysis of underlying equity holdings, then aggregated at the portfolio level and ranked against a global universe. Using Morningstar Direct, I screened the universe of 1,300 Canadian-listed ETFs that ranked:
- In the top quartile of funds using the quality factor, which considers both return-on-equity and debt-to-total-capital ratios (for example, in the table, a figure of 25 would mean the fund is ranked in the top 25 per cent of the universe);
- In the bottom quartile of funds using the volatility factor, which considers daily returns on a trailing 12-month basis for a fund’s underlying holdings, and noting that we prefer lower-ranked funds here (that is, 75 per cent or greater).
To ensure homogeneity of the categories in which I searched, I excluded sector equity funds and geographic equity funds.
What we found
The ETFs that met the above requirements are listed in the accompanying table, alongside their management expense ratios, trailing performance, category, and where available, their Morningstar rating. Also displayed are the factor profile ranks for the two factors outlined. It is worthwhile noting that many of these funds are quite new, which speaks to the utility of a holdings-based factor profile – it allows investors to glean insights without a very long performance history.
Investors are urged to first look at the category to which each fund belongs, to determine whether the geographic exposure of each fund makes sense for your overall asset allocation.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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