One of the most appealing smart beta factors is quality investing. Quality based investing is built to identify market leading companies, providing access to long term industry leaders with sustainable business models and growing competitive advantages. These quality companies have historically outperformed the broad market with lower volatility. Quality companies are positioned to respond to positive market conditions, as well as provide support to market contractions.
BMO ETFs quality suite provides an innovative approach to investing by selecting companies with high quality scores based on three fundamental variables: high return on equity, stable earnings growth and low financial leverage.
High ROE – Indicates a business with a sustainable competitive advantage, efficient operations and profitability.
Stable Earnings Growth – Demonstrates durability and stability of a company’s business model.
Low Financial Leverage – Determines if returns are based on underlying operations and protects on the downside.
Each variable on its own is not necessarily an indicator of a quality company. For example, high ROE could be an abnormal spike at one point in time or a result of high leverage. The three variables in combination provide a more accurate assessment. The methodology aims to not only capture the performance of high quality companies, but to ensure reasonably high trading liquidity and to moderate security turnover while staying cost effective. BMO ETFs quality suite is designed to be a core equity options providing effective exposures throughout the entire market cycle.