The conventional starting point for most investors is to identify which stocks they want to own and build a diversified portfolio around them.

While logical there may be a better way to go about the process which eliminates more risk. Why not start by identifying the weakest companies and eliminating them from a tailor-made diversified index?

In other words, turn the conventional process on its head and start by deciding in advance which companies are not desirable. After all, research has shown that most companies underperform, so removing more of them will naturally increase the odds of better overall performance.

In the search for such products Shares discovered the iShares MSCI World Quality Factor ETF (IWFQ).

While the product, which reinvests any income from its holdings automatically, doesn’t fit the exact criteria it does come very close. In an increasingly uncertain world, the fund’s quality tilt should provide investors with a less bumpy ride while also providing steady capital growth.

The $2.4 billion fund seeks to reflect the return of the MSCI World Sector Neutral Quality index by applying three equally weighted quality factors.

The company characteristics include a high percentage of earnings allocated to shareholders, low levels of debt and low variability of year-on-year earnings.

HOW HAS THE FUND PERFORMED?

Over the last five years the fund has generated an annualised return of 10.1% a year. Thus easily beating the 6.7% annualised return of the global large cap equity blend index.

The largest geographical weighting is to the US at 69.9% while Europe including the UK represents 22% and the rest is spread across developed Asia.

The fund is invested across 301 companies and given the sector neutral goal it is diversified across sectors with 40% allocated to interest rate sensitive sectors, just over a third in cyclicals and a quarter in defensive sectors.

The largest individual stock holding is US home improvement retailer Home Depot (HD:NYSE) which represents 4.4% of total assets.

Other top holdings include technology giants Microsoft (MSFT:NASDAQ), Apple (APPL:NASDAQ) and Nvidia (NVDA:NASDAQ).

Outside the US top holdings include Swiss consumer products company Nestle (NESN:SWX) and Danish diabetes and obesity drug specialist Novo Nordisk (NOVO:CPH).

The fund has an ongoing charge of 0.3% a year. Though remember, platform charges including dealing and custody fees need to be factored in on top.

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