JQUA: A Diversified, Lower Volatility Quality ETF

seekingalpha2024-09-16

Macroeconomic factors favor stable, profitable companies, making the JPMorgan U.S. Quality Factor ETF appealing for mitigating downside risk with consistent returns and lower volatility.JQUA focuses ...

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href=https://seekingalpha.com/article/4721300-jqua-a-diversified-lower-volatility-quality-etf><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Macroeconomic factors favor stable, profitable companies, making the JPMorgan U.S. Quality Factor ETF appealing for mitigating downside risk with consistent returns and lower volatility.JQUA focuses ...</p>\n\n<a href=\"https://seekingalpha.com/article/4721300-jqua-a-diversified-lower-volatility-quality-etf\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0234570918.USD","symbol_name":"高盛全球核心股票组合Acc 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mega-cap stocks like Microsoft and Apple, JQUA's diversified allocation strategy has delivered solid returns and lower volatility compared to peers.JQUA's quality approach makes sense for a diversified portfolio, especially given the positive long-term economic outlook and short-term macroeconomic challenges.   Thapana Onphalai Macroeconomic factors remain top of mind for investors, as a slow growth scenario and uncertainties regarding the interest path are tempered with an overall positive long-term outlook, supported by a strong labor market and easing inflationary pressures. This context underscores the appeal of investment alternatives with a bias toward more stable and profitable companies in the market, including funds with a selective approach toward these companies, like the JPMorgan U.S. Quality Factor ETF (NYSEARCA:JQUA), which employs a diversified allocation strategy favoring companies with higher profitability and earnings quality. This fund has delivered consistent returns, marginally above the Russell 1000 index and most quality ETFs, and with relatively lower volatility, making it a good fit for investors seeking exposure to the overall market while mitigating downside risk. ETF Description & Highlights JQUA is an exchange-traded fund that provides exposure to mid- and large-cap U.S. companies with higher quality characteristics, tracking the investment results of the parent JPMorgan US Quality Factor Index. This index, managed by FTSE, selects securities from the constituents of the Russell 1000 Index, which encompasses the 1,000 largest U.S. companies by market cap, generally corresponding to the universe of mid- and large-cap companies. The index provider adopts a rules-based proprietary selection process, applying a quality factor to identify higher-quality companies, measured by profitability, earnings quality, and solvency. Equity sectors such as financials and technology are weighted in the index according to their market cap, with individual stocks also weighted within each sector to ensure diversification. As of September 10, 2024, JQUA had $4.7 billion in AUM, invested in 275 companies, with an average market cap of $109.9 billion, primarily in large and mega caps, which make up roughly 63% of total holdings, while mid-caps correspond to 29% and small caps 6.9%. Compared to the Russell 1000 index, the preferred benchmark by the fund manager, and represented in this analysis by the iShares Russell 1000 ETF (IWB), JQUA is slightly more tilted toward lower capitalization companies, as the small- and mid-cap stocks account for roughly 24% of the index. JQUA's top ten holdings are Berkshire Hathaway (2.2%), Apple (2.0%), Meta Platforms (1.9%), Microsoft (1.8%), Visa (1.8%), Exxon Mobil (1.7%), Johnson & Johnson (1.6%), Procter & Gamble (1.6%), Mastercard (1.6%), and Alphabet (1.6%), representing a balanced approach across sectors such as financial services, technology, communication services, and healthcare, rather than an individual stock market cap-weighted allocation commonly seen in many funds.   Morningstar, consolidated by the author Below is a table comparing JQUA to a peer group of large-cap quality ETFs. QUAL and SPHQ are weighted based on quality metrics, while FQAL keeps a broader market sector exposure. TTAC has a diversified allocation across market capitalization categories. The last one, ROE, follows an equal-weight investment approach.   Morningstar, consolidated by the author From a sector allocation perspective, JQUA's largest allocation is to the technology sector, with 33.2% of total equities, followed by financial services with 14.2%, healthcare with 12.0%, consumer discretionary with 10.8%, industrials with 8.3%, consumer staples with 6.5%, communication services with 5.7%, energy with 3.7%, real estate with 2.7%, basic materials with 1.6%, and utilities with 1.4%. JQUA has a sector exposure largely similar to the Russell 1000 index, as JQUA's parent index provider aims to maintain sector exposure weighted by market cap. Discrepancies, such as JQUA's overweight allocation to technology, are likely a byproduct of recent sector holdings gains prior to the next rebalance. Despite this, there was a notable divergence relative to allocations to mega-cap stocks, as Microsoft, Apple, and Nvidia account for at least 5% each in the Russell 1000 index, while they represent less than 2% of JQUA. This is offset by overweight exposure to a number of second-tier large caps, such as Berkshire Hathaway, Visa, P&G, and tech names like AMD, Salesforce, and Oracle. Relative to the peer group of quality ETFs, JQUA is slightly overweight in financials, real estate, and consumer discretionary but with lower exposure to consumer staples, reflecting JQUA’s allocation in Berkshire Hathaway, Visa, Mastercard, and industries such as leisure and specialty retail.   Morningstar, consolidated by the author Valuation In Line With The Broader Market JQUA's price/earnings ratio of 22.4x is similar to the Russell 1000 index and the peer group of quality ETFs, as underweight positions in Microsoft (31.4x), Apple (32.9x) and no exposure to Amazon (38.0x) or Tesla (95.4x) are offset by lighter allocation to Costco (55.5x), as well as other tech companies like ServiceNow (62.3x) and Palo Alto Networks (55.4x). Paradoxically, the profitability measures of JQUA's portfolio, such as EBITDA margin and return on equity, are roughly four percentage points lower than the Russell 1000 index, due in part to JQUA’s lower allocation to three profitable names: Microsoft, Apple, and Nvidia.   Morningstar, consolidated by the author Solid Returns, Lower Volatility JQUA's total returns have largely met expectations for a quality fund, showing limited losses during years of negative returns in the equity market, like 2018 and 2022, and slight outperformance over the broader market, measured by the Russell 1000 index, in the last 3- and 5- year periods. JQUA has also done marginally better than the average of quality ETFs, with the second-best performance, just behind SPHQ. Its volatility has been lower than both the Russell and its quality ETFs peers, aided by its diversified allocation, where its top holding, Berkshire Hathaway, weighs only 2.2% of the fund.   Morningstar, consolidated by the author While JQUA has delivered solid performance, I view its diversification strategy as somewhat stringent. Greater exposure to companies like Microsoft or Apple would likely help performance in the long run, rather than just 1.8% and 2.0%, respectively. Nevertheless, the overall result of this strategy may still be positive for the fund, especially in the short term, as the macroeconomic outlook and political scenario are expected to keep volatility at elevated levels, particularly in an election year in the U.S., with uncertainties regarding the interest rate cut path.  That said, I consider funds with a quality approach, and JQUA in particular, as an important component in a diversified portfolio, given the overall constructive economic outlook in the long run, alongside some challenges in the coming quarters driven by the slowdown in economic activity and earnings growth.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2467811239"}