In short: ETF of the Month. Disclosed specification: TER 0.21%, physical replication, ISIN US46137V2410; European share class SPQA (ISIN IE000E6TPCH9). Method: start from the S&P 500, score every constituent on ROE, financial leverage and the accruals ratio, "keep only the 100 companies with the highest scores… weight each company based on its quality score and market capitalization." The case for each input is argued from data — highest-ROE quintile earns the highest returns (MSCI); low leverage doesn't help returns but high leverage hurts them (MSCI); companies with negative cash flow and negative earnings deliver negative returns (AQR). Sector mix: Information Technology 42.5%, Industrials 18.9%, Financials 15.3%. Top ten led by Lam Research 5.51%, Visa 4.90%, Mastercard 4.85%, GE Vernova 4.60%, Apple 4.58%, Sandisk 4.17%.
An ordinary S&P 500 fund buys all five hundred companies in proportion to their size, which means it buys the excellent ones and the value-destroying ones alike. The argument for doing something else is a statistic from Hendrik Bessembinder: across nearly a hundred years, the average American stock returned about 22,840% while the median one lost 7.4%. Almost all the gains come from a handful of names; most stocks are dead weight.
This fund tries to keep only the good part by scoring all five hundred companies on three measurable things and keeping the best hundred. The three are: how much profit a company earns on the money shareholders have put in (return on equity); how much it has borrowed (leverage); and how closely its reported profits match the actual cash arriving in the bank (the accruals ratio — a low number means the profits are real rather than accounting judgement). It then weights each survivor by its score and its size. The fee is 0.21% a year, and there is a European version, SPQA, for readers who cannot buy US funds.
One caution the letter does not raise. Because all three tests look backwards, a company earns its way into the fund when its recent profits are at their best — which is exactly the top of the cycle for a cyclical business. The disclosed top ten is more than 40% technology and led by Lam Research and Sandisk, both semiconductor names whose profits swing hard with the memory cycle. The same archive's stock-picking side refused that complex a month earlier on precisely those grounds.
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