Are Stock Quality ETFs Working?

Are stock quality strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider five ETFs, all currently available (from oldest to youngest):

• Invesco S&P 500 Quality ETF (SPHQ) – seeks to track performance of S&P 500 stocks with the highest quality scores based on firm return on equity, accruals ratio and financial leverage ratio, reformed semi-annually. The benchmark is SPDR S&P 500 (SPY).
• iShares Edge MSCI USA Quality Factor ETF (QUAL) – seeks to track performance of U.S. large-capitalization and mid-capitalization stocks selected based return on firm equity, earnings variability and debt-to-equity. The benchmark is SPY.
• iShares Edge MSCI Intl Quality Factor ETF (IQLT) – seeks to track performance of large-capitalization and mid-capitalization developed international stocks screened for attractive return-on-equity, earnings variability and debt-to-equity. The benchmark is iShares MSCI ACWI ex U.S. ETF (ACWX).
• Fidelity Quality Factor ETF (FQAL) – seeks to track performance of U.S. large-capitalization and mid-capitalization stocks with a higher firm quality profile than the broader market. The benchmark is Vanguard Russell 1000 Index Fund ETF (VONE).
• Vanguard U.S. Quality Factor ETF (VFQY) – applies a rules-based quantitative model to select U.S. common stocks with strong fundamentals (strong profitability and healthy balance sheets) across market capitalizations, sectors and industry groups. The benchmark is iShares Russell 3000 ETF (IWV).

We calculate monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the stock quality ETFs and benchmarks as available through June 2024, we find that:

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