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What is quality investing?
Quality investing aims to buy financially healthy companies with strong earnings and stable balance sheets that use their capital efficiently.
iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.
Find out more about iShares MSCI World ex Australia Quality ETF (IQLT)
https://www.blackrock.com/au/products/335480/
This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years with a high to very high risk/return profile.
Find out more about iShares MSCI World ex Australia Quality (AUD Hedged) ETF (IHQL)
https://www.blackrock.com/au/products/335483/
This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years with a high to very high risk/return profile.
Key takeaways
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Quality investing targets companies with strong earnings and stable finances.
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Quality investing has been around for decades and is backed by economic theory and real-world data.
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Quality strategies use metrics like profitability, stable earnings and low debt, to find firms with strong earnings and stable balance sheets.
Is it time to tilt your portfolio to higher quality?
Quality investing is a strategy that has been used by active managers for decades to select companies that have stronger financials than their similarly priced peers.
Now there's a simple way for investors to access companies with higher quality earnings.
The iShares MSCI World ex Australia Quality ETF, or IQLT.
IQLT, tracks an index that aims to target developed market stocks outside Australia with a consistent track record of strong earnings and stable balance sheets.
To do this, the index looks at three key metrics across each company. Return non-profitability, low debt and earnings consistency.
IQLT is constructed to provide broad exposure to stocks across all sectors and limit unintended risks.
The iShares MSCI World ex Australia Quality ETF provides easy access to an investing style that has historically outperformed the broad market over time, which investors can use as part of a strategic or a tactical equity allocation.
Find out more blackrock.com.au/ishares.
Why quality investing?
Imagine that you’re at the grocery store and looking to buy fruit. You notice today that the organic apples are priced the same as the non-organic apples. Given the current prices, you opt to buy the “higher quality,” organic apples. Think of quality investing in a similar light. Quality investors are looking to get more for their money.
Quality, like all our factor investing options, has an economic basis for its historical success and shows strong potential for future persistence.
Our approach to quality investing
BlackRock uses multiple metrics to identify quality stocks. The table below shows the three metrics that define BlackRock’s approach to quality investing. By using several metrics, we aim to more consistently capture the quality factor.
Return-on-equity (ROE) measures how profitable a company is by comparing its net income to its shareholders' equity. This metric shows how well a company uses investments from shareholders to generate profits. A higher ROE means the company is more profitable.
Debt-to-Equity (D/E) show how much a company is relying on borrowed money versus equity. A high D/E means the company has a lot of debt , which could mean more financial risk.
Debt-to-Equity (D/E) shows how much a company is relying on borrowed money compared to its own money. A high D/E means the company has a lot of debt, which could mean more financial risk.
Earnings Variability measures a company's ability to consistently grow earnings over time. A company with stable earnings during different economic cycles is considered less risky.
You can see an example of how the quality scoring system works below.
Source: BlackRock, MSCI. For illustrative purposes only.
Quality in portfolio construction
Building a quality portfolio involves several key decisions. For example: Should there be any constraints on sectors? How should companies be ranked against others?
We believe it makes the most sense to keep sector weights similar to the broad market. This lets quality investors find the best earnings across all sectors without making big bets on any one sector. Historically, having a constant overweight in certain sectors hasn't shown significant long-term returns above the market.1
We also think comparing a company's quality to its peers in the same sector allows for a more equal comparison.
As seen in the chart below, the MSCI World Sector Neutral Quality Index has very similar sector weights to the MSCI World Index, while the MSCI World Quality Index has significant overweights to tech and healthcare, and underweights to energy, real estate, and utilities.
Source: MSCI as at 31 December 2024.
ETFs can give easy access to quality investing
Quality investing is all about identifying financially healthy companies with strong balance sheets. It’s backed by economic data and academic research.2/3
Investors also need to be aware that international investing often comes with exposure to foreign currency movements, which can have a significant impact on returns. The more volatile the exchange rate between two currencies, the higher the risk and potential impact on returns. Investors wishing to reduce this volatility, can opt for the hedged version which can help minimise unintended currency bets.
Accessing quality through low-cost ETFs such as the iShares MSCI World ex Australia Quality ETF (IQLT) and iShares MSCI World ex Australia Quality (AUD Hedged) ETF (IHQL) allows investors to gain exposure to a diversified portfolio of stocks that look strong on multiple quality metrics — profitability, leverage, and earnings variability — with broad diversification across sectors.
Source: BlackRock, MSCI.