IQLT - IQLT: A Well-Diversified Ex-U.S. ETF

2023-10-05 08:00:00 ET

Summary

• iShares MSCI Intl Quality Factor ETF holds 300 stocks from developed markets and focuses on higher ROE, stable earnings growth, and lower financial leverage.
• The IQLT exchange-traded fund is well-diversified across countries, sectors, and holdings, with Switzerland, the UK, and Japan being the heaviest countries in the portfolio.
• Historical performance of IQLT is average among competitors, but the dividend growth rate since inception has beaten inflation.

This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted when necessary.

IQLT strategy and portfolio

iShares MSCI Intl Quality Factor ETF ( IQLT ) started investing operations on 01/13/2015 and tracks the MSCI World ex USA Sector Neutral Quality Index. It has a portfolio of 300 stocks, a 12-month distribution yield of 2.25% and a total expense ratio of 0.30%. Distributions are paid semi-annually.

As described in the prospectus by iShares , the underlying index weights constituents of the MSCI World ex USA Index (the parent index) based on market capitalization adjusted with a quality score including three metrics: return on equity (higher is better), year-over-year earnings growth (stable is better) and financial leverage (lower is better). Constituent weights are capped at 5% and normalized so that sectors have approximately the same weight as in the parent index. The index is rebalanced twice a year. The portfolio turnover rate was 32% in the most recent fiscal year.

In this article, I will use iShares Core MSCI EAFE ETF ( IEFA ) as a benchmark.

The fund invests mostly in Europe (about 65% of asset value) and in large companies (89%). The top three countries are Switzerland (13.4%), the U.K. (12.8%) and Japan (12.7%). Other countries are below 10%. Hong Kong weighs 2.6%, so direct exposure to geopolitical and regulatory risks related to China is low. As reported on the next chart, IQLT is better diversified across a number of countries than IEFA, where Japan weighs 24.4%.

The top four sectors are financial (20%), industrials (15.6%), healthcare (12.5%) and consumer discretionary (10.5%). Other sectors are below 10%. No sector weighs more than 20%, which is a good point regarding diversification. The sector breakdown is close to the benchmark. IQLT slightly overweights financials and energy.

The top 10 holdings, listed below, represent 27.9% of asset value. The heaviest one weighs 5.44%, so risks related to individual companies are moderate.

* Tickers in primary exchanges. Some of them have ADRs listed in the U.S.: to find them, copy and paste the company name in Seeking Alpha’s search box.

Past performance compared to competitors

The next chart plots the total return of IQLT, IEFA and three quality-focused ex-US ETFs without currency hedge:

• WisdomTree Global ex-U.S. Quality Dividend Growth ( DNL ), reviewed here ,
• WisdomTree International Quality Dividend Growth Fund ( IQDG ), reviewed here,
• FlexShares International Quality Dividend Index Fund ( IQDF ).

The chart starts on 4/11/2016 to match all inception dates.

IQLT comes second after DNL. However, it has been lagging a bit in 2023 to date, but it is almost on par with the benchmark IEFA:

The annual sum of distributions has increased from $0.70 to $1.02 per share between 2015 and 2022. It is a 45.7% growth in 7 years, while the cumulative inflation has been about 25% (based on CPI). Although IQLT is not a dividend-growth fund, the distribution growth rate since inception has beaten inflation. Regarding dividend growth, IQLT is behind IQDG and DNL, but much better than IQDF and IEFA, whose distributions have decreased in 5 years.

Takeaway

iShares MSCI Intl Quality Factor ETF holds 300 stocks from developed markets outside the U.S. Constituent weights are based on market capitalization and a quality score fostering higher ROE, stable earnings growth and lower financial leverage. The fund is well-diversified across countries, sectors and holdings. The heaviest countries in the portfolio are Switzerland, the UK and Japan, and the top sectors are financials, industrials and healthcare. Historical performance is average among competitors. The iShares MSCI Intl Quality Factor ETF distribution yield is quite low, but the dividend growth rate since inception has beaten inflation.

For further details see: