Morningstar Investor users sign in here.

ETFs

Morningstar reaffirms Silver Medalist Rating on quality ETF

This top ranked ETF is focused on quality shares.

Mentioned: VanEck MSCI Intl Quality (Hedg) ETF (QHAL), Vaneck Msci International Quality Etf (QUAL)


In the pursuit of high-quality global equities at a low cost, the VanEck MSCI International Quality ETF (ASX: QUAL) shines as a fine choice according to Morningstar Manager Research analysts.

Our confidence in this strategy's consistent potential to outpace its peers and build long-term wealth for investors remains steadfast.

For investors who want to remove exposure to currency there is a hedged version available (ASX: QHAL). The unhedged version charges a fee of .40% while the hedged version has a fee of .43%. 

What are quality shares and why do investors seek them out?

Stocks with quality traits are expected to be more resilient during the distressed market and high-volatility conditions, which leads to outperformance.

To illustrate, when the broader market declined by 8%, and an average manager in its Morningstar Category lost 13% (during February-March 2020), QUAL lost just 2.5%. However, last year (2022), the same resiliency has not been observed as IT stocks declined notably.

How are holdiings selected

The portfolio identifies high-quality stocks based on attractive return on equity, stable earnings growth, and low financial leverage. This approach yields a portfolio that has notable differences with the MSCI World ex Australia Index in two broad areas: tilt toward more large-cap growth names and skewness in sectors and geographic exposure.

Technology and healthcare are overweightings, while financials are underweightings, as their leveraged balance sheets often do not fit the quality parameter of the strategy.

We view this composition as sensible for diversification of an Australian investor’s equity exposure, where domestically the market is dominated by financials and materials.

A dominance of tech and healthcare names has led to ballooning U.S. exposure (77% as of Oct. 31, 2023); however, we do not view this as a specific risk given the underlying holdings are generally mega-cap multinationals, generating a substantial part of their revenues outside the U.S.

Qual

How has the ETF performed

Historical performance is not necessarily an indication that any investor should choose a strategy. Performance should be put into context.

QUAL’s lack of exposure to small caps and mid-caps, paired with the quality-growth orientation of the portfolio stemming from overweightings in information technology and healthcare, have been the prime drivers of outperformance since inception.

Over the trailing three-and five-year periods through October 2023, the strategy’s performance is ranked in the first quintile of its category. Its risk-adjusted performance is eye-catching, too; the trailing three-and five-year risk-adjusted return ranks in the first quintile within the category.

Specifically, impressive performance in choppy markets (like in 2018 or during the coronavirus-driven selloff) upholds the underlying quality growth factor theme of the strategy. Except in 2022, the fund has not underperformed the category index or category average in any calendar year since inception.

The weakening global growth outlook amid the material rise in interest rates weighed on the strategy’s performance in 2022. However, the ETF has rebounded strongly so far this year, delivering 29.2% annualized over the trailing 10 months as global recession fear remained subdued and inflation projections remained steady.

In summary, QUAL is an attractive option for investors aiming to diversify their core Australian equity holdings. Its robust investment rationale, efficient execution, and strong track record to date, with an appealing price, make it a very attractive choice.



© 2024 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar
Our top rated global small-cap ETF
ETFs
Our top rated global small-cap ETF
This ETF offers unbeatable value in a difficult to navigate market segment at a compelling price.
The simplicity of a three ETF portfolio
ETFs
The simplicity of a three ETF portfolio
Investing doesn't have to be complicated. 
A step-by-step process for choosing an ETF
ETFs
A step-by-step process for choosing an ETF
My journey to find an income generating ETF for my portfolio.
Our favourite ETFs for exposure to the US share market
ETFs
Our favourite ETFs for exposure to the US share market
These are the top picks from our analysts for ETFs that provide access to the US share market.
Selecting ETFs and building a portfolio
ETFs
Selecting ETFs and building a portfolio
Investors are inundated with choice with ETF offerings expanding rapidly. Learn how to pick ETFs that meet you investment goals.
Morningstar’s verdict on the 3 most popular ETFs
ETFs
Morningstar’s verdict on the 3 most popular ETFs
Our analysts’ takes on Australia’s largest ETFs