Quality Stamp

Content provided by Josh Jenkins, CLS Research/Portfolio Analyst

One of our primary investment themes at CLS, as we entered 2013, was a focus on quality within the portfolios. The thought was that companies with stable earnings and strong balance sheets should do well in a slow growth and potentially high interest rate environment. Fast forward to September and CLS has stayed true to this theme. The economy continues to chug along at an underwhelming pace, interest rates have moved up considerably, and valuations of the high quality companies remain attractive.

To understand how we execute on this investment theme, you must first understand what we mean by “quality”. When we conduct our analysis, we use several metrics to measure the quality of an ETF and its underlying components:

  • ROE – Return On Equity
  • ROA – Return On Assets
  • NPM – Net Profit Margin
  • DTC – Debt To Capital Ratio
  • MOAT – A term coined by Warren Buffett that represents the competitive advantage that one company has over other companies in the same industry.

So where exactly is all of the quality coming from in our portfolios? Below are a few examples of the different methods and ETFs we use to gain exposure to what we consider high quality:

  • Dividend Grower ETFs
    • VIG – Vanguard Dividend Appreciation
    • PID – Powershares International Dividend Achievers
  • High Quality ETFs
    • SPHQ – Powershares S&P 500 High Quality
    • MOAT – Market Vectors Wide MOAT
    • QUAL – iShares MSCI USA Quality Factor
  • Large Company ETFs
    • MGK – Vanguard Mega Cap Growth ETF
    • IOO – iShares Global 100
  • Growth ETFs
    • IWF – iShares Russell 1000 Growth
    • IWY – iShares Russell Top 200 Growth
An ETF is a type of investment company whose investment objective is to achieve the same return as a particular market index. An ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index.