The American Century U.S. Quality Growth ETF (NYSEARCA:QGRO) invests across growing companies with high-quality fundamentals. While the strategy is passively managed, the underlying index features a monthly rebalancing, allowing the exposure to gradually adjust to changing market conditions and manage risk.
Backed by a solid investment thesis built around stocks well-positioned to deliver positive long-term returns, QGRO has favorably outperformed the SPDR® S&P 500 ETF Trust (SPY) since its 2018 fund inception date. On the other hand, the fund’s performance has been mixed more recently and underwhelming against its actual category benchmark over different timeframes.
Balancing the strengths and weaknesses of QGRO, could this ETF make a good addition to your portfolio? Here’s what you need to know.
What is the QGRO ETF?
QGRO is intended to track the proprietary “American Century U.S. Quality Growth Index.” This is a rules-based index meant to capture the performance of large- and mid-capitalization U.S. companies that possess attractive quality, growth, and valuation metrics.
According to the methodology, the index starts with a universe of approximately the largest 1,000 U.S. equities by market value. The security selection then ranks or scores each company across several fundamental attributes covering profitability, value, growth trends, balance sheet position, etc.
Various constraints are utilized to ensure a balance between companies presenting “pure growth” or “stable growth” factors that can shift over time depending on combined score attributes. Each holding is capped at a 3.5% weighting down to a 0.25% lower limit.
Going through the current portfolio, QGRO is invested across 192 stocks, with a large-cap tilt and 36% concentration in the Technology sector. Familiar names comprise the top holdings, including Alphabet Inc. (GOOG), (GOOGL), NVIDIA Corporation (NVDA), and Meta Platforms, Inc. (META) among the largest positions.
While there are not too many surprises as to what the strategy considers quality-growth stocks, QGRO stands out through its specific composition that ends up being unique in contrast to alternative funds overwhelmed by mega-caps.
Top holdings from the Industrials sector like EMCOR Group, Inc. (EME) and W.W. Grainger, Inc. (GWW) are recognized as quality-growth stocks, but not as widely held as their Tech and Consumer Discretionary counterparts. By this measure, one strong point of QGRO is its potential as a portfolio diversifier, essentially overweighting certain stocks compared to broad-market funds.
Finally, it’s worth mentioning that QGRO distributes a quarterly dividend that yields a modest 0.32% considering.
QGRO Performance
We mentioned that QGRO has outperformed the S&P 500 since it became publicly listed about six years ago. The ability to generate excess returns of a flagship large-cap index highlights the attraction of the quality-growth strategy and is a record where the data speaks for itself.
That being said, that feather in the fund’s cap is overshadowed by a less impressive history against its benchmarks, which are the “Russell 1000 Growth Index” and the “Spliced U.S. Quality Growth” proxy. In this case, QGRO has underperformed both over the past year, 3-years, 5-years, and since inception look back periods.
We’ll compare QGRO with the iShares MSCI USA Quality Factor ETF (QUAL) and the iShares Russell 1000 Growth ETF (IWF) as a proxy for both benchmarks. These two ETFs can be seen as an alternative to QGRO, with QUAL focusing on quality stocks, while IWF is a good large and mid-cap growth fund.
All three have overlapping holdings, but QUAL and IWF are more “top-heavy” with a higher concentration among the top investments.
Simply put, the performance of QUAL and IWF benefited recently from an overweight position in names like Nvidia and Meta Platforms. QGRO was held back through its weighting constraint and more balanced approach, particularly as mega-cap stocks led higher.
What’s Next For QGRO?
The good news is that amid the ongoing bull market in stocks, QGRO should continue to deliver positive returns, staying generally correlated to broad market indexes.
At the same time, whether it outperforms or lags benchmarks is uncertain. As long as the U.S. economy remains resilient, the backdrop for risk assets favors more upside.
The main risk to consider would be a scenario where global macro conditions deteriorate. Themes like elevated inflation and high interest rates warrant a layer of caution that could kickstart a new round of volatility going forward.
Final Thoughts
In the competitive universe of exchange-traded funds where investors have seemingly unlimited options, the ability to stand out is a recurring challenge for all funds.
We haven’t seen enough from the American Century US Quality Growth ETF to say it is a better option compared to a more vanilla growth fund or quality factor-focused strategy. It’s difficult to justify an investment in QGRO when it hasn’t been able to keep up with published performance benchmarks.
It’s still possible that the table will turn in the next decade, with QGRO running away from IWF for any number of reasons. Ultimately, we’ll need more time through several market cycles to access the fund’s true potential.
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