In this episode of “What’s the Risk?” we take a look at the historic performance of the MSCI World ex Australia Small Cap Quality 150 Index.
Some people would know an ETF that seeks to track the performance of this index as VanEck’s QSML ETF.
We briefly look at how the index is constructed by MSCI, but you can refer back to our previous video on MSCI World ex Australia Quality Index for a better discussion on quality.
The index itself draws from MSCI World ex Australia Small Cap Index, so we compare the performance of the two indices since January 1999. If we take MSCI’s screen for quality and size, there certainly appears to have been a premium attached to it over this time period.
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Synopsis
Decoding the MSCI World ex Australia Small Cap Quality Index (QSML): A Deep Dive into Performance and Risk
In this insightful episode of “What’s the Risk?”, we explore the MSCI World ex Australia Small Cap Quality 150 Index, the benchmark for the popular VanEck QSML ETF [00:19]. This video is essential for investors interested in global small-cap quality stocks.
The discussion begins by outlining MSCI’s definition of “quality,” based on key financial metrics: high return on equity (ROE) [01:38], stable year-over-year earnings growth [01:42], and low financial leverage [01:47]. However, Peter Mancell critically examines the index’s selection process, noting that it narrows the investment universe significantly by choosing only 150 out of nearly 4,000 small-cap stocks [01:51]. He questions whether focusing on the largest 4% of stocks aligns with the traditional “small cap effect” [03:11].
The video provides a comprehensive performance analysis, demonstrating how the quality index has consistently outperformed its parent index, with a notable 3.5% per annum difference over 25 years [04:49]. Detailed charts illustrate periodic performance, calendar year returns, and the significant growth of wealth achieved by the quality index [05:42]. The analysis also covers rolling annual returns, highlighting the quality index’s resilience during downturns [06:57].
Crucially, the video delves into risk assessment, comparing the largest falls and recovery times during events like the GFC, where the quality index showed slightly less severity and quicker recovery than its parent [07:41]. The risk-return chart clearly indicates that while the MSCI World ex Australia Small Cap Quality index exhibits higher volatility, it has delivered significantly higher average returns, proving that the increased risk has been well-rewarded [08:13]. This video offers invaluable insights for anyone looking to understand the intricacies and potential of small-cap quality investing.
