GMO’s ETF debut features flagship US quality strategy

Nov 20th, 2023 | By | Category: Equities

GMO, the $60 billion Boston-based investment firm founded by Jeremy Grantham, has launched its first ETF, an active fund that taps into the firm’s flagship strategy of investing in high-quality US equities.

Jeremy Grantham, co-founder and Long-Term Investment Strategist at GMO

Jeremy Grantham, co-founder and Long-Term Investment Strategist at GMO.

The GMO US Quality ETF (QLTY US) has been listed on NYSE Arca with an expense ratio of 0.50%.

QLTY was brought to market through the Goldman Sachs ETF Accelerator, a digital platform that enables Goldman Sachs’ clients to quickly and efficiently launch, list, and manage their own ETFs.

According to GMO, the fund’s launch aligns with the firm’s mission to expand access to long-running, institutional-grade GMO strategies through the tax-advantaged and operationally efficient ETF structure.

Scott Hayward, CEO of GMO, commented: “GMO has always been committed to offering innovative investment solutions in the implementation structures that best address the needs of our clients. The launch of our first ETF and potential future ETFs are a natural evolution of that commitment, meeting demand from the intermediary and wealth management channels.”

Investment approach

The fully transparent ETF leverages GMO’s more than 40 years of quality investing experience, replicating the GMO Quality Strategy which currently houses $15bn in assets and has a performance track record stretching back to 2004.

The strategy centers on investing in high-quality US equities, defined as companies with resilient business models, robust profitability, and strong balance sheets. GMO’s approach, developed in the 1980s, leverages a blend of forward-looking fundamental analysis and quantitative vetting to identify companies with enduring growth potential and minimal risk. It includes a systematic screening for quality characteristics like profitability and balance sheet strength, and a proprietary discounted cash flow framework for valuation analysis.

Since its launch, the strategy has consistently exceeded the performance of the S&P 500, achieving an annual return of 9.32%, surpassing the benchmark’s 9.11%. This trend of outperformance extends across various time frames, including one, three, five, and ten years. In the last year, the strategy’s return reached an impressive 26.85%, significantly higher than the S&P 500’s 21.62%. Over a five-year period, the strategy’s return of 11.03% also notably exceeds the benchmark’s 9.92%. Additionally, this outperformance has been achieved with lower volatility, as indicated by a five-year trailing standard deviation of 17.15%, compared to the S&P 500’s 21.36% (data as of 30 September 2023).

Jeremy Grantham, co-founder and Long-Term Investment Strategist at GMO, said: “Quality has a claim on being the most mispriced characteristic in the market over the last 100 years. Since we began researching quality in the 1980s, GMO has focused on finding companies with a consistent and enduring ability to deliver high returns on their investments.”

Tom Hancock, Head of GMO Focused Equity and Portfolio Manager of QLTY, added: “Investing in quality businesses has won over time with lower risk. With our focus on valuation, we believe GMO’s Quality strategy is truly for all markets, able to find great opportunities at attractive prices to participate in the upside of growth periods, while also mitigating risk in weaker environments. Today, as investors have concerns about issues like interest rates, inflation, and the threat of a recession, we believe Quality can be a particularly worthwhile, resilient investment.”

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