JOET: Quality, Equal Weight, Worth a Watch (NYSEARCA: JOET) | Private Equity Weekly

This is the person and then the index. First came indexes, then ETFs. Many people are familiar with media personality Joe Terranova. He has an index and a fund designed to track that index, which is rules-based.methodology It’s worth watching independently of Mr. Terranova himself.

this Virtus Terranova US Quality Momentum ETF (NYSE: Rivers) is primarily designed to provide investment in large, publicly traded U.S. companies that demonstrate strong quality fundamentals as well as positive technology trends. This ETF seeks to mimic the performance of the Terranova US Quality Momentum Index (before fees and expenses). The index focuses on the 500 largest companies in the United States and screens them based on positive technology momentum, then ranks them based on fundamental quality indicators. Therefore, this results in an equally weighted portfolio of 125 mature U.S. securities.

The screening process has a solid foundation in fundamentals, which I like because it eliminates the risk of investing in a portfolio with so-called “zombie companies” that are high in debt and fundamentally ranked by return on equity and growth. Then, when you combine it with the momentum technical filter, it enhances the attractiveness relative to the passive cap-weighted average.

Uncovering JOET’s key assets

A closer examination of an ETF’s holdings can provide a clearer picture of the fund’s investment strategy and the potential risks and rewards associated with it. The fund’s holdings include the following. Note that since the weightings are equal, no one stock is the primary driver of overall performance.

JOET is diversified into several areas. Its largest investment area is the information technology sector, accounting for approximately 30.19% of the fund’s investment portfolio. This is followed by industrials (16.46%), financials (14%), consumer cyclical goods (10.08%), healthcare (8.75%) and energy (6.98%).

One of the reasons I like this fund is that it has a large mid-cap allocation. About half are in the mid-cap range, while the rest are in the large-cap to mega-cap range. Given my general concerns about the dominance of large-cap stocks in the current cycle, it’s nice to have a fund like this that is less tilted without having to take on the risk of small-cap stocks.

Comparison with peer ETFs

The investing approach and methodology of the Virtus Terranova US Quality Momentum ETF (JOET) differs from that of the iShares MSCI USA Quality Factor ETF (QUAL) and the Invesco S&P 500 Quality ETF (SPHQ). QUAL aims to track the MSCI US Quality Index, which focuses only on quality factors without considering momentum aspects, while SPHQ tracks the S&P 500 High Quality Ranking Index, which also focuses on quality indicators for US large-cap stocks. Both QUAL and SPHQ are passively managed and strive to closely replicate their respective indices.

In terms of portfolio characteristics, JOET adopts an equal weighting approach in each quarter’s index adjustment, aiming to ensure balance and diversification and reduce the risk of excessive concentration in specific stocks or sectors. This contrasts with the cap-weighted strategies typically managed by passively managed funds such as QUAL and SPHQ. Obviously, this goes a long way to explaining why JOET has lagged QUAL and SPHQ over the past two years.

Advantages and Disadvantages of Investing in JOET

As with any investment, JOET has its own pros and cons. On the positive side, its quality and momentum-based strategies can deliver attractive risk-adjusted returns over the long term. It provides exposure to a variety of large U.S. companies that are fundamentally sound, potentially reducing the risk of excessive concentration in a single industry or company.

The downside, however, is that ETF strategies are primarily technical and retrospective and may overlook the importance of idiosyncratic and qualitative risk factors. Additionally, ETFs may not be the best choice for income-focused investors.

Concluding Thoughts: To invest or not to invest?

The Virtus Terranova US Quality Momentum ETF offers a unique investment strategy that combines quality and momentum factors. It offers a diversified portfolio of large-cap U.S. publicly traded companies and demonstrates a solid risk management approach. However, like all investments, it has its own risks and considerations. I like the overall filtering and equal weighting approach, so while performance has been poor given the cycle we’re in, I still think it’s worth considering in a portfolio.