One of the key reasons investors buy exchange traded funds (ETFs) is for the diversification these funds provide, relative to the otherwise concentrated nature of most stock picker portfolios.
In this context, I’m going to highlight one ETF I think provides investors with very broad exposure to a range of high-quality names on the stock market today, allowing investors to more broadly diversify their portfolios at a relatively low cost.
The Xtrackers Ruseell 1000 QARP ETF (NYSE:QARP) is a multi-factor ETF that takes the largest 1000 companies in the Russell Index, which accounts for approximately 90% of the U.S. market, and picks stocks on the basis of the quality and value characteristics of these companies.
The ETF essentially rates companies on their quality and value on the basis of profitability and leverage metrics, cash flow yield, earnings yield, and price to sales metrics.
I think finding ETFs like this that have a value and quality tilt are hard. This is also a fund that provides such diversification at a very low management expense ratio, making this one of the cheapest and easiest ways to diversify one’s portfolio with more concentration on value and quality, two factors which are difficult for the average investor to assess.
This ETF is weighted more toward larger cap companies, so investors should note that size plays into the equation more than some other ETFs. This means that when one looks at the average price to earnings ratio of this fund relative to other funds or the broader market, one might think this is high for a value-oriented ETF. I think the safety these large caps provide is a very good tradeoff to the higher price one must pay today for access to these world-class companies.
Invest wisely, my friends.
