Quality is a sought-after, fundamental investment factor whose origins in investment theory date back to the 1930s. Traditionally, quality companies are consistent in their earnings, profitable, and solvent. Firms that have these traits fall under the quality factor umbrella.
However, finding the right quality screens is important, as recent market events have impacted many firms that have fallen under the traditional umbrella of quality.
Quality reimagined in the wake of COVID-19
The COVID-19 pandemic created a surge in the total debt of nonfinancial businesses. After a decade of debt growth averaging roughly 5.5%, debt jumped 9.1% in 2020. On the heels of COVID-19, increased inflation led to higher interest rates.
This means more firms have more debt that will be harder to refinance. Even firms that traditionally succeeded at being considered examples of quality investing are now contending with higher debt and less ability to navigate that debt successfully. Companies that would otherwise introduce stock buybacks or pay out dividends must instead direct more earnings toward clearing outstanding debt.
Getting the right quality screen
Screening for quality has arguably never been more important. Solvency is critical. In 2022, almost half of all publicly listed firms were unprofitable despite fewer firms declaring bankruptcy.
VettaFi’s Quality Indexes measure the performance of U.S. companies, focusing on the highest quality scores. Profitability and solvency are targeted, and sector restraints and market cap weight are considered. (A full breakdown of the methodology is covered here.)
The VettaFi US Large/Mid-Cap Quality Index outperformed the benchmark VettaFi 1000 Index, which comprises the largest 1,000 publicly traded stocks in the U.S. market.
Learning more about VettaFi’s approach to quality
Interested in learning more about how the VettaFi US Large/Mid-Cap Quality Index is constructed? Our recent white paper explores our approach to the new quality factor. Download the paper here.
Want to use the VettaFi US Large/Mid-Cap Quality Index or leverage our index factory to create your product? Speak to our index specialists today.
