Why Invest in
Low Quality Stocks?

What is a low quality stock?

The quality factor refers to the tendency of high quality stocks with more stable earnings, stronger balance sheets, and higher margins to outperform over a long time horizon. Indices that track quality stocks tend to rank stocks based on high return on equity (ROE), low leverage or debt to equity, and stable earnings. A low quality stock would be defined as a stock that scores low on those characteristics.

Why invest in low quality stocks?

At first glance, an investor would seemingly want to avoid low quality stocks since the literature suggests high quality stocks tend to perform over the long term. However, if you look at the chart below, you’ll see that low quality index (as defined by S&P) outperformed the S&P 500 in 4 calendar years from 2011 – 2020. During that same period, low quality stocks also outperformed high quality stocks in 4 different years.

Although we at Pacer ETFs don’t advocate for a buy and hold strategy of low quality stocks, we believe investors can take advantage of these periods of outperformance by investing in a multifactor rotation strategy that includes both the traditional and non-traditional sides of each of the four factors and allocates to low quality stocks during periods when they exhibit outperformance vs the benchmark