2023-04-11 16:12:19 ET
Summary
- JPMorgan U.S. Quality Factor ETF invests in Russell 1000 stocks selected for profitability, earnings quality, and solvency.
- It is overweight in information technology.
- Aggregate quality metrics are good, but exposure to risky stocks is quite high for a quality-style ETF.
- Past performance is good relative to competitors, but just on par with the S&P 500.
This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings change over time, updated reviews are posted from time to time.
Strategy and portfolio
JPMorgan U.S. Quality Factor ETF ( JQUA ) has been tracking the JP Morgan US Quality Factor Index since 11/08/2017. It has 243 holdings, a 12-month distribution yield of 1.47%, and an expense ratio of 0.12%. Distributions are paid quarterly .
As described in the prospectus by JPMorgan, eligible companies are Russell 1000 constituents. The underlying index…
…t argets equity securities with higher quality characteristics relative to their sector peers as measured by profitability, earnings quality and solvency/financial risk.
The fund invests almost exclusively in U.S. companies (98.6% of asset value), mostly in large and mega-caps (about 72%). The heaviest sector in the portfolio is technology, with 27.2% of assets. It is followed by consumer discretionary and healthcare (tie at 13.9%), industrials (12.9%) and financials (10.9%). Other sectors weigh less than 6% individually and 21% in aggregate. Compared with the S&P 500 (SPY), the fund significantly overweights consumer discretionary and industrials. It underweights mostly communication services.
Sector breakdown (Chart: author; data: JPMorgan, SSGA)
JQUA is more expensive than SPY regarding the price/book and price/sales ratios, but it is a bit cheaper in price/earnings and price/cash flow (see next table).
JQUA | SPY | |
P/E TTM | 20.12 | 20.62 |
Price/Book | 5.08 | 3.78 |
Price/Sales | 2.99 | 2.39 |
Price/Cash Flow | 14.2 | 15.41 |
Data: Fidelity.
The top 10 holdings, listed below, represent 20% of asset value. The heaviest one weighs about 2.3%. Risks related to individual companies are low, the fund is well-diversified across holdings, but keep in mind it is overweight in technology.
Ticker | Name | Weight% | EPS growth %TTM | P/E TTM | P/E fwd | Yield% |
Meta Platforms, Inc. | 2.27% | -37.7826 | 25.01 | 21.50 | 0 | |
NVIDIA Corp. | 2.26% | -54.7065 | 158.37 | 61.38 | 0.06 | |
Alphabet, Inc. | 2.23% | -20.041 | 23.72 | 20.73 | 0 | |
Microsoft Corp. | 2.22% | -4.3121 | 32.18 | 31.07 | 0.94 | |
Apple, Inc. | 2.10% | -2.2812 | 27.53 | 27.19 | 0.57 | |
Visa, Inc. | 1.94% | 18.7534 | 32.31 | 26.77 | 0.79 | |
Berkshire Hathaway, Inc. | 1.84% | -125.917 | N/A | 20.10 | 0 | |
Procter & Gamble Co. | 1.75% | 0.6327 | 26.51 | 25.87 | 2.42 | |
Exxon Mobil Corp. | 1.70% | 146.4262 | 8.62 | 11.04 | 3.18 | |
Mastercard, Inc. | 1.64% | 16.6629 | 35.23 | 29.51 | 0.63 |
Performance
JQUA is almost on par with the S&P 500 (SP500) in total return from 11/15/2017. It shows a slightly lower volatility, so the risk-adjusted performance is a bit higher (measured by Sharpe ratio in the next table).
Total Return | Annual.Return | Drawdown | Sharpe ratio | Volatility | |
JQUA | 74.94% | 10.91% | -32.92% | 0.61 | 17.29% |
SPY | 75.53% | 10.98% | -33.72% | 0.55 | 18.41% |
The next chart compares the 5-year total return of JQUA and three close competitors:
- iShares MSCI USA Quality Factor ETF ( QUAL ), reviewed here
- Invesco S&P 500 Quality ETF ( SPHQ ), reviewed here
- Vanguard U.S. Quality Factor ETF ( VFQY ), reviewed here .
JQUA leads the group, almost tie with SPHQ.
JQUA vs competitors, 5-year total return (Seeking Alpha)
Comparing JQUA with my quality benchmark
In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets , Piotroski F-score , and Altman Z-score .
The next table compares JQUA since inception with a subset of the S&P 500: stocks with an above-average dividend yield, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. It is rebalanced annually to make it comparable with a passive index.
Total Return | Annual.Return | Drawdown | Sharpe ratio | Volatility | |
JQUA | 74.94% | 10.91% | -32.92% | 0.61 | 17.29% |
Large cap quality subset | 91.08% | 12.74% | -35.57% | 0.61 | 18.70% |
Past performance is not a guarantee of future returns. Calculated with Portfolio123.
JQUA lags my quality subset by 15 percentage points in total return. However, the fund performance is real, whereas the subset is simulated. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).
Scanning JQUA with quality metrics
JQUA currently holds about 240 stocks, of which 32 are risky regarding my metrics. In my ETF reviews, risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are unreliable. Here, risky stocks weigh 9% of asset value. It is acceptable, but quite high for an ETF focused on quality.
According to my calculation of aggregate metrics reported in the next table, the portfolio quality is significantly superior to the S&P 500. The return on assets looks especially good.
JQUA | SPY | |
Altman Z-score | 6.04 | 3.42 |
Piotroski F-score | 5.94 | 5.58 |
ROA % TTM | 12.32 | 7.61 |
Takeaway
JQUA invests in Russell 1000 stocks using a systematic strategy based on profitability, earnings quality, and financial risk. It is overweight in technology, with about 27% of asset value in this sector. As expected, my own calculation confirm the high quality of the portfolio. However, the JPMorgan U.S. Quality Factor ETF exposure to risky stocks is relatively high for a quality-style ETF. Historical performance is good relative to competitors, but underwhelming relative to the S&P 500: it is just on par with the benchmark in total return since inception. Anyway, quality characteristics may temper volatility in a bear market.
For further details see:
JQUA: A Quality ETF Beating Competitors, But Still Unconvincing