I am trying to build a multi-factor portfolio which includes the Quality factor. However, I am having problem finding out which of the ETFs (that I am considering) has higher profitability / quality premium, and thus it contains more "quality" stocks as well.
I read the book "Your Complete Guide to Factor-Based Investing" by Andrew L Berkin, Larry E Swedroe where it was mentioned that:
- Firms with high profitability measured by earnigns have high subsequent returns after controlling for book-to-market ratio and investment.
- Profitability has roughly same power as book-to-market ratio in predicting the cross-section of average returns.
- Profitabile firms tend to be growth firms with high cash flows
- Profitable firms generate significally higher returns than unprofitaable firms, despite having significantly higher valation ratios (e.g. price-to-book ratio)
- Controlling for profitability dramatically raises the performance of value strategies, especially among the largest, most liquid stocks. Controlling for book-to-market ratio improves the performance of profitability strategies.
So I was thinking how to use this information in order to recognize a quality company. So I digged out the following information for ETFs I am considering:
- Price/Earnings Ratio
- Price/Cashflow Ratio
- Price/Book Ratio
- Price/Sales Ratio
and stock style percentage:
Now I am trying to understand how to use this metrics to find out an ETF with the highest quality premium. From the upper most points 1) & 4) I guess I should consider ETF which has Price/Earning and Price/Book ratios? From the point 3) I guess I have to aim for an ETF that has big allocation in "Large-Growth" stocks. I also think that Price/Cashflow Ratio might play a role as well?
Basically my quesiton boils down to what correlation the above metrics (ratios) need to have in order to be classified as a high quality ETF?
Sorry if my questions seem to be confusing, but I have begun getting into finances only recently and have a totally different background.
Thank you in advance!