3 Big Benefits of the Quality Factor

Snapshot

Despite surging interest rates and persistent inflation, Quality names, especially in the Information Technology and Communication Services sectors, have rallied significantly amid the artificial intelligence (AI) boom — demonstrating investors’ focus on strong company fundamentals over immediate macroeconomic conditions. BMO Quality ETFs invest in blue-chip companies with the potential for greater long-term growth and less volatility than the broad market.

Details

Three benefits of the Quality factor:

Long-term growth: Quality companies typically have low earnings variability, high margins, and loyal consumer bases, giving them the capacity to invest heavily in growth projects and research and development.
Reliable earnings: Invests in securities with solid fundamentals, stable earnings, and robust balance sheets, which can provide resilience during high market volatility.
Lower risk profile: Despite being concentrated in more volatile sectors like Information Technology, the Quality factor maintains lower risk profiles than Technology sector funds alone.

Quality performs under pressure

BMO Quality ETFs, including ZGQ, ZUQ and ZEQ, provide exposure to high-quality growth companies — defined as market leaders with durable business models and sustain competitive advantages. These companies typically have high return on equity (ROE), stable earnings across changing business cycles, and strong balance sheets.

Given these criteria, the composition of the ETF indices has featured relatively substantial weights in Quality growth names, such as Apple, Microsoft, Mastercard, Alphabet (Google) and other cash-generative “earnings machines.” Year to date, the largest cap names in these spaces have rallied significantly, as the demand for AI has only increased. As a result, the BMO Quality suite holds prominent weights in the Information Technology and Communication Services sectors. Consequently, ZGQ, ZUQ and ZEQ have outperformed their parent indices — the MSCI All Country World High Quality Index, MSCI USA Quality Index and the MSCI Europe Quality 100% Hedged to CAD Index, respectively — with ZGQ notably beating the index by 6.6%¹. This outperformance can be attributed to a higher weighting in the Information Technology sector within the quality suite versus the broader indices.

BMO MSCI All Country World High Quality Index ETF (Ticker: ZGQ) vs. MSCI ACWI Index

ZGQ – Top additions by weight
Name	Sector	Country	Weight
PepsiCo Inc	Consumer Staples	U.S.	1.3
ConocoPhilips	Energy	U.S.	0.7
United Parcel Service Inc	Industrials	U.S.	0.6
Synopsys Inc	Information Technology	U.S.	0.4
Chipotle Mexican Grill Inc	Consumer Discretionary	U.S.	0.3
Glencore PLC	Materials	GB	0.3
Shin-Etsu Chemical Co Ltd	Materials	JP	0.3
Reckitt Benckiser Group PLC	Consumer Staples	GB	0.3
Woodside Energy Group Ltd	Energy	AU	0.2
DSV A/S	Industrials	DK	0.2

ZGQ – Top deletions by weight
Name	Sector	Country	Weight
Home Depot Inc/The	Consumer Discretionary	U.S.	2.5
Nestle SA	Consumer Staples	CH	2.1
Intel Corp	Information Technology	U.S.	0.5
Target Corp	Consumer Discretionary	U.S.	0.4
Blackstone Inc	Financials	U.S.	0.3
Emerson Electric Co	Industrials	U.S.	0.2
VMware Inc	Informational Technology	U.S.	0.2
AI Rajhi NV	Financials	SA	0.2
Stellantis NV	Consumer Discretionary	IT	0.2
Anglo American PLC	Materials	GB	0.2

Source: MSCI and Bloomberg, as of June 1, 2023.

BMO MSCI USA High Quality Index ETF (Ticker: ZUQ) vs. MSCI USA Index

ZUQ – Top additions by weight
Name	Sector	Country	Weight
PepsiCo Inc	Consumer Staples	U.S.	2.2
AbbVie Inc	Health Care	U.S.	2.0
ConocoPhilips	Energy	U.S.	1.0
Synopsys Inc	Information Technology	U.S.	0.6
Chipotle Mexican Grill Inc	Consumer Discretionary	U.S.	0.5
Autodesk Inc	Information Technology	U.S.	0.3
Carrier Global Corp	Industrials	U.S.	0.3
Keysight Technologies Inc	Information Technology	U.S.	0.2
CDW Corp/DE	Information Technology	U.S.	0.2
Builders FirstSource Inc	Industrials	U.S.	0.1

Source: MSCI and Bloomberg, as of June 1, 2023.

ZUQ – Top deletions by weight
Name	Sector	Country	Weight
Home Depot Inc/The	Consumer Discretionary	U.S.	4.1
Intel Corp	Information Technology	U.S.	0.8
Intuitive Surgical Inc	Health Care	U.S.	0.0
Target Corp	Consumer Discretionary	U.S.	0.5
Blackstone Inc	Financials	U.S.	0.4
VMware Inc	Information Technology	U.S.	0.4
Emerson Electric Co	Industrials	U.S.	0.4
LyondellBasell Industries NV	Materials	U.S.	0.2
Church & Dwight Co Inc	Consumer Staples	U.S.	0.2
Tyson Foods Inc	Consumer Staples	U.S.	0.1

Source: MSCI and Bloomberg, as of June 1, 2023.

BMO MSCI Europe High Quality Hedged to CAD Index ETF (Ticker: ZEQ) vs. MSCI Europe Index

ZEQ – Top additions by weight
Name	Sector	Country	Weight
Muenchener Rueckversicherungs	Financials	DE	1.4
Sika AG	Materials	CH	1.2
Rheinmetall AG	Industrials	DE	0.3
Smurfit Kappa Group PLC	Materials	IE	0.3
IMCD NV	Industrials	NL	0.2
Mowi ASA	Consumer Staples	NO	0.2
Admiral Group PLC	Financials	GB	0.2
Yara International ASA	Materials	NO	0.2
GEA Group AG	Industrials	DE	0.2
Clariant AG	Materials	CH	0.1

Source: MSCI and Bloomberg, as of June 1, 2023.

ZEQ – Top deletions by weight
Name	Sector	Country	Weight
Prosus NV	Consumer Discretionary	NL	1.6
AXA SA	Financials	FR	1.5
Stellantis NV	Consumer Discretionary	IT	1.1
Rentokil Initial PLC	Industrials	GB	0.5
Endesa SA	Utilities	ES	0.2
EQT AB	Financials	SE	0.2
Volvo AB	Industrials	SE	0.1
Salmar ASA	Consumer Staples	NO	0.1
Demant A/S	Health Care	DK	0.1
DiaSorin SpA	Health Care	IT	0.1

Source: MSCI and Bloomberg, as of June 1, 2023.

Maintaining a persistent edge

The Quality factor seems well-positioned as central banks near the terminal interest rate and inflation moves lower. Higher quality blue-chip stocks, especially in Information Technology and Communication Services sectors, should perform well going forward, given their strong balance sheets and low debt utilization amid an elevated interest rate environment.

The emergence of AI services like ChatGPT, developed by OpenAI, has boosted the Technology space. Given the scale of infrastructure needed to deploy these services successfully, we believe that large technology companies held within the Quality suite, especially in the U.S., will retain a competitive advantage over smaller cap names.

¹MSCI and Bloomberg, as of July 25, 2023.

Disclosure:

Advisor Use Only.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

The communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Risk tolerance measures the degree of uncertainty that an investor can handle regarding fluctuations in the value of their portfolio. The amount of risk associated with any particular investment depends largely on your own personal circumstances including your time horizon, liquidity needs, portfolio size, income, investment knowledge and attitude toward price fluctuations. Investors should consult their financial advisor before making a decision as to whether this Fund is a suitable investment for them.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

^®/TMRegistered trademarks/trademark of Bank of Montreal, used under licence.