QLTY's 37% Tech Allocation Was A Tailwind; Now It's A Liability

"The GMO U.S. Quality ETF ( NASDAQ:QLTY) has attracted $3 billion since launching in November 2023 by focusing on companies with exceptional returns on capital. That strategy delivered 20.5% returns over the past year by concentrating on profitable technology leaders like Microsoft ( NASDAQ:MSFT) and Meta Platforms ( NASDAQ:META), outpacing the S&P 500 ( NYSEARCA:SPY) by roughly 500 basis points. Yet Reddit investors increasingly debate whether valuations have stretched too far entering 2026."

"Quality strategies thrive when investors prioritize profitability over speculation, but QLTY's 37% allocation to Information Technology creates direct exposure to valuation risk. Top holdings average forward price-to-earnings ratios near 25x, reasonable for companies growing revenue at double-digit rates. The problem is quality premiums evaporate quickly when interest rate expectations shift or growth disappoints. Watch the Federal Reserve's quarterly Summary of Economic Projections, published after each FOMC meeting. If the median dot plot shifts toward fewer rate cuts or higher terminal rates, technology multiples typically compress"

"During the 2022 rate hiking cycle, quality-focused funds underperformed value strategies by 20 percentage points as investors rotated toward cheaper, cash-generative businesses. QLTY didn't exist then, but its semiconductor equipment exposure through Lam Research ( NASDAQ:LRCX) and chip holdings would have faced similar pressure. The Micro Factor: Earnings Quality Within Holdings Meta illustrates the complexity of quality investing. Despite maintaining a 30.9% profit margin and 32.6% return on equity, the company's earnings collapsed 82.6% year-over-year as Reality Labs investments mounted."

QLTY attracted $3 billion since launching in November 2023 by targeting companies with exceptional returns on capital. The strategy returned 20.5% over the past year, led by profitable technology names such as Microsoft and Meta, and outpaced the S&P 500 by roughly 500 basis points. The ETF holds 37% in Information Technology and top holdings show forward price-to-earnings near 25x. Quality premiums can vanish when interest-rate expectations rise or growth disappoints. Fed projections and dot-plot shifts can compress technology multiples. QLTY's 48% top-ten concentration increases sensitivity. Historical rate cycles saw quality underperform value by about 20 points. Meta has high margins and ROE but suffered an 82.6% earnings decline due to Reality Labs spending.

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