In 2024, GMO’s inaugural exchange-traded fund is outperforming the S&P 500, even though it does not include the surging stock of artificial-intelligence sensation Nvidia Corp.
According to FactSet data, the GMO U.S. Quality ETF QLTY has outperformed all three major U.S. equity indexes this year, with a gain of 10.6% through Monday. The S&P 500 has experienced an 8.6% increase over the same period, with the Nasdaq Composite showing a slightly higher advancement of 8.9%. Meanwhile, the Dow Jones Industrial Average has seen a more modest increase of 3.1%.
Since its launch in November, the GMO U.S. Quality ETF has attracted approximately $600 million in assets under management. The fund is the inaugural ETF introduced by GMO, the investment firm co-founded by the renowned investor Jeremy Grantham.
Consistently outperforming benchmarks is a challenging task for stock pickers, as highlighted by the findings of S&P Dow Jones Indices. In 2023, a significant majority of active large-cap U.S. equity funds fell behind the S&P 500 for the 14th consecutive year. The S&P 500 is once again reaping the rewards of substantial gains from Nvidia and other megacap stocks, commonly referred to as Big Tech.
“Many of the winners this year have been in the field of AI across the market,” stated Tom Hancock, who is the head of focused equity at GMO and also serves as the lead portfolio manager of the GMO U.S. Quality ETF, during a phone interview. “We have a strong presence in that area.”
The GMO U.S. Quality ETF holds the top two positions in Big Tech stocks, Microsoft Corp. and Google parent Alphabet Inc. The fund holds positions in other megacap companies in the same category, such as Meta Platforms Inc., Amazon.com Inc., and Apple Inc., as per GMO’s website data on Monday.
However, Nvidia, a chip maker that has significantly outperformed other Big Tech stocks this year with a substantial gain of approximately 86%, is not included in GMO’s ETF. Nvidia’s stock has experienced a remarkable surge in value, driven by the excitement of investors regarding advancements in AI. This has propelled its market value to an impressive $2.2 trillion.
According to Hancock, the company is of good quality, but there are concerns about its valuation. He believes that there are other options available that offer similar exposure at a lower cost.There is a significant ecosystem in AI.
As an example, the holdings of the GMO U.S. Quality ETF consist of Broadcom Inc., a company that specializes in custom AI chips, as well as Lam Research Corp. and KLA Corp., both of which are semiconductor equipment companies, according to Hancock.
Shares of KLA have experienced a significant increase of 23.6% this year through Monday, while Lam Research has also seen a positive growth of 18% year to date.
Meanwhile, Meta has experienced a significant increase of 31.6% in 2024 through Monday, while Amazon has seen a rise of 24.2%, Alphabet has climbed by 20.3%, and Microsoft has advanced by 10%, as per FactSet data.
However, GMO saw a buying opportunity due to the 5.6% decline in Apple shares this year through Monday.
Hancock mentioned that the firm’s ETF included Apple shares in its portfolio in the recent month or so. He predicts that artificial intelligence will fuel a wave of upgrades for the iPhone, which he believes is a robust platform that people will increasingly rely on to access AI.
Not only focused on AI
“It’s not only AI that has contributed to the gains this year for the GMO U.S. Quality ETF,” Hancock explains.
According to him, GE has shown impressive performance, citing the company’s shift from being a conglomerate to a more focused business centered around jet engines. Shares of GE Aerospace have seen a significant increase of 65% this year through Monday.
Meanwhile, Hancock mentioned that healthcare is a significant area of focus for us, presenting numerous opportunities. He mentioned that the GMO U.S. Quality ETF holds stocks in the healthcare sector, including Johnson & Johnson, UnitedHealth Group Inc., and Eli Lilly and Co.
Johnson & Johnson and UnitedHealth have experienced a decline in their performance thus far in 2024. According to the speaker, Eli Lilly has been a standout in the ETF’s portfolio this year, thanks to the high level of investor interest in its weight-loss drug Zepbound. Shares of Eli Lilly have experienced a significant surge of 31.5% in 2024 through Monday.
Meanwhile, GMO included Thermo Fisher Scientific Inc. TMO, +0.20% in its portfolio earlier this year as a means of participating in biotech innovation without relying heavily on a specific outcome, according to Hancock. “They are essential tools for the industry.”
Fed’s rate path?
The ETF offered by GMO follows a strategy that focuses on a mix of growth and value stocks, with a particular emphasis on defensive bets like Coca-Cola Co. within the consumer staples sector, as stated by Hancock.
However, he mentioned that the fund, which consists of 35 stocks in total, does not attempt to predict economic cycles, despite the fact that market participants closely monitor new data related to the U.S. economy.
On Friday, investors analyzed the U.S. jobs report for April, which came in softer than expected. The stock market experienced a significant rise that day, a situation that seemed contradictory, with “bad news is good news” being the prevailing sentiment, according to Hancock.
Investors seemed to react positively to the slightly weaker jobs data for April, interpreting it as a favorable report that maintained optimism for a smooth economic transition and the possibility of interest rate reductions by the Federal Reserve later this year.
U.S. stocks soar on a favorable jobs report, instilling confidence in Wall Street as the fear gauge declines.
According to Hancock, the GMO U.S. Quality ETF focuses on companies that have a promising long-term future, regardless of interest rates and the economic cycle. “We aim to determine whether it is a cycle or a long-term trend,” he stated.
“If we view it as a cycle, we refrain from attempting to predict it,” stated Hancock. “The magnitude of the AI opportunity in the next four or five years will remain unaffected by a 50 basis point increase or decrease in interest rates.”
Similar to a quantitative analyst, GMO’s ETF, with an annual expense ratio of 0.5%, ended Monday with a 1% gain. The S&P 500 index ended the day with a 1% gain.The ETF offered by GMO follows a “quality core” strategy, combining growth and value stocks in a concentrated portfolio. It also includes some defensive positions, such as Coca-Cola Co. within the consumer staples sector.
However, he mentioned that the fund, consisting of a total of 35 stocks, does not attempt to predict economic cycles, despite the fact that market participants closely monitor new data related to the U.S. economy.
On Friday, investors analyzed the U.S. jobs report for April, which came in weaker than expected. The stock market experienced a significant increase on that particular day, a situation that seemed contradictory as “negative news turned out to be positive” for the market, according to Hancock.
Investors seemed to react positively to the slightly weaker jobs data for April, interpreting it as a favorable report that maintained optimism for a smooth economic transition and the possibility of interest rate reductions by the Federal Reserve later this year.
According to Hancock, the GMO U.S. Quality ETF focuses on companies that have a promising long-term outlook, regardless of interest rates and the economic cycle. “We aim to determine whether it is a cycle or a secular trend,” he stated.
“If we view it as a cycle, we refrain from attempting to predict it,” stated Hancock. Regardless of whether interest rates increase or decrease by 50 basis points, the size of the AI opportunity in four or five years will remain unaffected.
Similar to a quantitative analyst, GMO’s ETF, with an annual expense ratio of 0.5%, ended Monday with a 1% increase. The S&P 500 index closed 1% higher as well.
