Quality Check

• Advisors may be able to improve tax efficiency, lower costs, and still maintain exposure to higher quality companies in their clients’ portfolios by replacing more expensive, underperforming active managers with a factor ETF like QUAL.
• Since its launch in July 2013, QUAL has historically outperformed its Morningstar peer group and has had top decile performance over the trailing decade in its Morningstar category.
• Aside from being cheaper than 99% of its peers when looking at expense ratios,¹ QUAL has also provided strong exposure to quality stocks.

Advisors play a pivotal role in helping their clients achieve their goals through prudent portfolio construction and thoughtful analysis. Conducting thorough due diligence of ETFs and mutual funds requires understanding a portfolio manager’s investment process and philosophy.

One additional area where advisors can add value for their clients is ensuring their investments are tax efficient. As we enter the 4^th quarter, now is a great time for advisors to monitor their funds from a tax perspective so they are not blindsided with capital gains distributions. It may also be a good time to consider investing uninvested cash into higher quality companies that may provide higher expected returns.

During Q4, many advisors look for opportunities to help their clients by taking advantage of tax loss harvesting opportunities. Using QUAL as a potential replacement for large blend funds that have historically distributed capital gains may be one way to reduce taxes for clients.

While QUAL’s peers in the Morningstar Large Cap blend category have distributed 6.9% on average, QUAL has never paid a capital gains distribution since inception.² Advisors may be able to use the tax season as a way to provide tax alpha for their clients through tax loss harvest trades, while also being able to invest in an ETF that has historically been tax efficient.

Quality, like all factors we believe in at BlackRock, is supported by empirical data and academic theory. While cash may provide clients comfort that their money is “safe” compared to “risky” stocks, investors may be missing out on higher potential returns with equities.

Investing in stocks with higher profitability, low leverage, and stable earnings growth may be one way for clients that are hesitant to re-invest cash to get back into the market. Seminal research on the quality factor goes back decades and has shown that higher quality companies have historically had higher excess returns than their lower quality peers.³ Investors may now be able to capture these “higher quality” characteristics in a low-cost, rules-based ETF such as QUAL.

Since its launch in July 2013, QUAL has historically outperformed its Morningstar peer group and has had top decile performance over the trailing decade in its Morningstar category.

Being able to efficiently capture a factor in a repeatable and transparent manner is one of the criteria that we believe is needed to be considered a style factor. Quality is one of a handful of factors that meets our criteria, and QUAL’s 10+ year live history gives us further belief in the robustness of the quality factor.

Factor based ETFs allow investors to harvest historically rewarded sources of returns in a transparent manner. With an expense ratio of 0.15%, QUAL provides investors access to higher quality exposure at a low cost.

Despite being cheaper than 99% of its peers when looking at expense ratios,⁴ QUAL has also provided strong exposure to quality stocks – a good reminder that sometimes you may be able to get more quality exposure at a lower cost.

Investors have added in over $11.6 billion in inflows into iShares quality ETFs so far in 2023.⁵ Advisors have looked to QUAL as a low-cost, tax efficient way to capture the quality factor in US equities.

Financial advisors may be able to improve tax efficiency and lower costs in their clients’ portfolios by replacing more expensive, underperforming active managers with QUAL. One of the biggest potential benefits – they can lower costs and potential tax bills, without having to sacrifice exposure to higher quality companies (See exhibit 4).

As we approach the end of the year, advisors may benefit from doing some final “quality checks” in their client portfolios. There may be opportunities to add value for their clients in the final quarter of 2023.