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        Weekly ETF Brief

        Factoring in Cash Flow: the Rise of Quality Aristocrats

        Investors targeting quality factor exposure now have a flexible option, aligned to the free cash flows of quality companies.

        3 min read
        Ryan Reardon
        Senior Equity ETF Strategist

        Quality strategies represent approximately 9% ($12.6 billion) of assets under management (“AUM”) in European-listed factor exchange traded funds. This is the 4th largest factor category after Yield, Size, and Value.1 The available offering predominantly consists of ETFs tracking a MSCI Sector Neutral Quality Index.

        Figure 1 – Quality Index Methodologies

         

        S&P Quality FCF Aristocrats Index

        MSCI Sector Neutral Quality Index

        Ticker

        SPDQFAUN Index
        SP5QFAUN Index

        M1WONQ Index
        M1USSNQ Index

        Selection Universe

        S&P Developed LargeMidCap Index
        S&P 500® Index

        MSCI World Index
        MSCI USA Index

        Eligibility Criteria

        No Real Estate
        No Banks, Insurance*
        + FCF for 10 consecutive years

        All constituents of selection universe

        Construction

        Select top 100 stocks with 10+ years of uninterrupted positive FCF and a high FCF Score, which is based on FCF Margin and ROIC

        Select an optimised basket with the highest Quality Score computed within the sector, which is based on ROE, Debt to Equity, and Earnings Variability

        Weighting Scheme

        The product of the float-adjusted market cap and the FCF Score

        The product of the market cap weight and the Quality Score

        Stock Weight Constraint

        5% maximum

        5% maximum**

        Sector/Industry Constraint

        40% maximum

        Sector neutral at rebalance

        Country Constraint

        60% maximum

        None

        Factor Constraint

        None

        Yes, see index methodology

        Turnover Constraint

        None

        Yes, see index methodology

        Target Constituents

        100

        Optimised

        Rebalance Frequency

        Semi-Annual (3rd Friday in April and October)

        Semi-Annual (Last business day in May and November)

        Source: S&P Dow Jones Indices, MSCI, as of 30 November 2024. The information contained above is for illustrative purposes only. *Other GICS sub-industries not eligible for inclusion are Mortgage REITs, Specialized Finance, Asset Management & Custody Banks, and Investment Banking & Brokerage.**In a narrow selection universe, where the maximum stock exceeds 10%, the maximum stock weight is the weight in the selection universe.

        We. have partnered with S&P to provide investors with a new type of quality factor exposure, the SPDR® S&P Quality Aristocrats. Offering exposure to World (S&P Developed Quality FCF Aristocrats Index) and US equities (S&P 500 Quality FCF Aristocrats Index), the tracking methodology uses Free Cash Flow (“FCF”) as a basis for measuring a given company’s quality features.

        Quality is an objective measure of certain variables which identify businesses with competitive advantages and long-term plans. It's based on the idea that investors are willing to pay more ‘premia’ for certain attributes such as profitability, low leverage, and low earnings variability. FCF is the amount of cash generated by a business after accounting for cash outflows to support operations, maintain capital assets, and pursue organic growth. Simply put, it is the excess cash that a company produces after accounting for the costs of running a business and capital expenditures. FCF allows the firm increased financing flexibility, it can be used to pay dividends, buy back stock, pay down debt or reinvested to support other business growth opportunities.

        The Aristocrats’ Approach is Longevity

        These new index exposures represent an expansion of S&P’s “Aristocrats” franchise. SPDR® has long offered investors the opportunity for yield factor exposure with S&P’s Dividend Aristocrats® family of indices. The Aristocrats brand emphasizes the selection of high quality companies based on longevity. These concepts select for companies with established long-term track records of delivering in a desired factor category. In the yield category, Dividend Aristocrats are companies with a track record of paying regular cash dividends to investors, uninterrupted. In the quality category, Quality Aristocrats are companies with a track record of generating positive free cash flow for investors, uninterrupted. 

         

        Figure 2 – S&P Aristocrats Methodologies

        Strategy Dividend Aristocrats Free Cash Flow (“FCF”) Aristocrats
        Focus Select companies with an uninterrupted long term track record of paying regular cash dividends. Select companies an uninterrupted long term track record of positive FCF, with a higher FCF margin and ROIC.

        Investment Rationale
        • Equity participation
        • Reliable income stream
        • Defensive qualities
        • High absolute returns
        • Exposure to high quality growth stocks
        Target Companies Dividend Aristocrats tend to be mature, blue-chip companies focused on operating efficiency. Quality FCF Aristocrats tend to be earlier stage with more growth opportunities.
        Capital Return Policy More likely to return capital through the regular dividend. Capital is returned to shareholders through dividends and buybacks, but also a higher level of reinvestment in growth opportunities.
        Factor Exposure Yield (with Value tilt) Quality (with Growth tilt)
        SPDR Funds

        SPDR® S&P® Global Dividend Aristocrats UCITS ETF (Dist)

        SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF (Dist)

        SPDR® S&P Developed Quality Aristocrats UCITS ETF (Acc)

        SPDR® S&P 500® Quality Aristocrats UCITS ETF (Acc)

        Source: State Street Global Advisors, S&P Dow Jones Indices, as of 31 October 2024. The information contained above is for illustrative purposes only.

        Flexibility in Targeting Quality

        Quality aristocrats take a relatively unconstrained approach to harvesting the quality factor. By limiting the allocation constraints, the quality aristocrats has the flexibility to go ‘wherever it needs’ to find companies with higher margin profitability and higher return on capital. As a result, the strategy is likely to reflect structural and tactical sector bias over time. As of the end of November, the developed market exposure (S&P Developed Quality FCF Aristocrats Index) is reflecting a significant bias towards the Technology sector and away from the Industrials sector.  

        Sector

        MSCI World Index

        S&P Developed Quality FCF Aristocrats Index

        Active Weight

        Technology

        25.47%

        39.54%

        14.07%

        Financials

        16.19%

        17.91%

        1.72%

        Industrials

        10.97%

        4.66%

        -6.31%

        Health Care

        10.71%

        16.30%

        5.59%

        Cons Disc.

        10.68%

        6.93%

        -3.75%

        Comm. Srvcs

        7.82%

        5.97%

        -1.85%

        Cons Staples

        6.15%

        5.03%

        -1.11%

        Energy

        3.90%

        0.00%

        -3.90%

        Materials

        3.39%

        3.36%

        -0.03%

        Utilities

        2.54%

        0.30%

        -2.25%

        Real Estate

        2.18%

        0.00%

        -2.18%

        Bloomberg Finance L.P., as of 02 December 2024. This information should not be considered a recommendation to invest in a particular sector, country or to buy or sell any security shown. It is not known whether the sectors, countries or securities shown will be profitable in the future. Holdings and Characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. Diversification does not ensure a profit or guarantee against loss

        In today’s environment of high inflation and high interest rates, having a healthy cash flow is particularly important as debt has become both harder and more costly to issue. SPDR® ETFs now offer a systematic approach to identifying high quality companies that have a long term track record of being most efficient at converting revenue into free cash flow with the new family of Quality Aristocrats ETFs. 

        QDEV GY

        QDEV GY

        SPDR® S&P Developed Quality Aristocrats UCITS ETF (Acc)

        View Fund Details
        Share Class

        -

        QUS5 GY

        QUS5 GY

        SPDR® S&P 500 Quality Aristocrats UCITS ETF (Acc)

        View Fund Details
        Share Class

        -

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        MARKETING COMMUNICATION

                                           

        FOR PROFESSIONAL INVESTORS USE ONLY.

         

        SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR ALL. SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.

         

        Investing involves risk including the risk of loss of principal.

         

        ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.

         

        The S&P 500® Index is a product of S&P Dow Jones Indices LLC or its affiliates (“S&P DJI”) and have been licensed for use by State Street Global Advisors.  S&P®, SPDR®, S&P 500®,US 500 and the 500 are trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and has been licensed for use by S&P Dow Jones Indices; and these trademarks have been licensed for use by S&P DJI and sublicensed for certain purposes by State Street Global Advisors. The fund is not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of these indices.

         

        The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.

         

        The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

         

        All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

         

        This content has been issued by State Street Global Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.

         

        FOR EUROPEAN SPDR ETFs and MANAGED FUNDS:

         

        Please refer to the Fund’s latest Key Information Document (KID) and Prospectus before making any final investment decision. The latest English version of the prospectus and the KID can be found at www.ssga.com/ch/en_gb/institutional/ic/fund-finder. A summary of investor rights can be found here:

         

        Managed Funds: https://www.ssga.com/library-content/products/fund-docs/summary-of-investor-rights/ssga-investors-rights-summary-non-etf-ireland.pdf

         

        SPDR ETFs: https://www.ssga.com/library-content/products/fund-docs/summary-of-investor-rights/ssga-spdr-investors-rights-summary.pdf

         

        Note that the Management Company may decide to terminate the arrangements made for marketing and proceed with de-notification in compliance with Article 93a of Directive 2009/65/EC.

         

        SPDR ETFs is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.

         

        SSGA SPDR ETFs Europe I & SPDR ETFs Europe II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organized as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorized as a UCITS by the Central Bank of Ireland.

         

        FOR STRATEGIES:

         

        This document provides summary information regarding the Strategy. This document should be read in conjunction with the Strategy's Disclosure Document, which is available from SSGA. The Strategy Disclosure Document contains important information about the Strategy, including a description of a number of risks.

         

        The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

        4978691.4.1.EMEA.INST

        Exp: 30.06.2025 

        © [[]] %%State Street Corporation%%. All rights reserved.
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