Quality Control: Investor Choice in Quality ETFs

Key Points:

• In today's uncertain market environment, investors are increasingly turning to quality investing as a strategy to navigate uncertainty and pursue more stable returns.
• Quality investing extends outside the traditional definition of recurring profitability. Investors can also focus on investments that target favorable characteristics such as low leverage and stability in earnings across various markets spanning equities and fixed income.
• Investors can access a wide variety of investment options that incorporate quality. Portfolio implementers looking to incorporate quality but also seek nimbleness in their portfolio can consider coupling systematic and actively managed quality exposures, and we see this happening in practice today.

Why is Quality Important Today?

In today’s market environment—characterized by elevated volatility and a higher interest rate regime—quality has become increasingly important. Investors are placing greater value on companies with strong current profitability, as opposed to those with uncertain future earnings. Additionally, companies burdened with heavy debt can be more vulnerable to financial distress, making lower leverage a desirable trait.

A recent BlackRock's analysis of over 20,000 advisor portfolios revealed that the average portfolio has a higher-than-benchmark exposure to leverage and a lower-than-benchmark exposure to profitability—largely due to small-cap positioning, which tends to be both unprofitable and leveraged¹. Quality factor ETFs seek to offset this imbalance.

Quality factor ETFs such as the iShares MSCI USA Quality Factor ETF (QUAL) aim to target high-quality companies that tend to exhibit certain characteristics:

• Higher profitability: Companies with stronger current profitability often have a wider financial moat to withstand uncertainty.
• Lower debt: High interest rates and potential volatility can make heavily indebted companies more susceptible to financial distress.
• Stable current earnings: Investors may prefer established companies exhibiting current stable, recurring earnings over less profitable growth companies with less-certain future earnings potential.

Companies with these characteristics may prove to be more resilient amidst today’s challenging market conditions.

Case Study: Can quality be found internationally?

While QUAL provides investors with exposure to U.S. quality, investors seeking quality exposure beyond the U.S. can turn to the iShares MSCI International Quality Factor ETF (IQLT). IQLT targets high-quality companies in developed markets outside the U.S. When thinking about quality investing overseas, historically, international companies have had lower profitability than their U.S. counterparts. IQLT provides "US-like" quality exposure as measured by return on equity (ROE) profitability as shown below.

Furthermore, investors may find IQLT interesting as it has exhibited a better up/down capture ratio, than its Morningstar Category, Foreign Large Blend, as shown below.

From an investor flows perspective, YTD in 2025, IQLT has gathered net inflows of over $2.8 billion² indicating demand for quality strategies in international markets. Notably, investors can also turn to the iShares MSCI Global Quality Factor ETF (AQLT) and the iShares MSCI Emerging Markets Quality Factor ETF (EQLT) for global and emerging markets quality exposures respectively, speaking to the variety of ways in which the iShares suite can help bring quality investing to investors.

How can portfolio builders incorporate Quality?

Portfolios can gain exposure to quality in a variety of ways. For example, a portfolio could own QUAL and the iShares U.S. Equity Factor Rotation Active ETF (DYNF), alongside one another as complementary exposures. QUAL provides systematic exposure to resilient characteristics like profitability to help target stability across all types of markets. On the other hand, DYNF, which also provides exposure to quality, seeks to outperform the U.S. equity market by actively selecting stocks with additional factor characteristics that the PM’s believe are likely to excel in the near term, such as value, small size, low volatility and momentum. Relative to QUAL, DYNF seeks to capture more alpha³opportunities in a market environment experiencing a greater level of dispersion through frequent tactical adjustments by an active manager. Notably, DYNF recently boosted its exposure to quality given its economic model has pointed towards a slowdown in the economic regime.

Where else can investors find quality:

There are other ways investors can access quality. For instance, investors looking for a growth exposure may consider the iShares MSCI USA Quality GARP ETF, (GARP). This strategy seeks a growth screen as its main objective but also incorporates quality to tilt the portfolio towards resilience, and value to avoid overpriced stocks. A concern amongst growth investors is that such stocks may be priced at a premium due to the market’s high expectation of future growth. Tilting towards quality and value in a growth portfolio seeks address this concern by capturing more reasonably priced more resilient growth opportunities.

Quality can be found in other asset classes too, like fixed income. The iShares High Yield Systematic Bond ETF (HYDB) incorporates quality by screening out certain bonds with the highest probability of default (which is a measure of credit quality). For more information on HYDB please visit link.

Conclusion

BlackRock views quality as a compelling investment characteristic in today's market environment and offers a variety of exposures through which investors can access quality. High interest rates, inflation, and macroeconomic uncertainty make quality companies with strong recurring profitability and low leverage potentially more attractive. By focusing on quality today, investors can seek to navigate market uncertainty and pursue more stable returns.

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