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Jeremy Grantham’s GMO launched its first ETF with top portfolio managers. Here’s what’s in it

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Jeremy Grantham’s investment firm is taking its first steps to enter the world of exchange traded funds, debuting a new offering modeled on one of Grantham, Mayo, Van Otterloo’s crown jewel mutual funds. The GMO U.S. Quality ETF (QLTY) launched last Wednesday, marking the investment firm’s first ETF. The fund has an expense ratio of 0.50% and will disclose its holdings daily. The new ETF will be managed by the same team that helms GMO Quality III mutual fund ( GQETX ). That fund has a five-star rating from Morningstar , and in 2023 is on track to finish in the top half of its category for the sixth time in the past seven years. It has also outperformed the SPDR S & P 500 Trust (SPY) over the past decade. Tom Hancock, head of focused equity at GMO and one of the managers of the fund, said that the key difference between the two products is that the ETF will focus only on U.S. stocks, while the mutual fund has about 20% of its assets in non-American companies. The fund is designed to be a building block of a larger portfolio, rather than a way for investors to get defensive during uncertain times, Hancock said. “I think of this as a core holding rather than something you would trade in and out of based on some top down view of when’s a good time for quality,” Hancock said. GMO’s team views quality companies as those that generate high return on investment, measured through metrics like profitability and cash flow, and have strong balance sheets, Hancock said. The actively managed fund’s top holdings after its first day of trading included tech giants like Microsoft , health care stocks like UnitedHealth and an industrial company in General Electric . The active fund has less than 40 stocks in its portfolio, and Hancock said the fund tries to be more selective than similarly named funds that focus just on single factors like quality. “There is a value component to what we do. We think about the quality of the company, but we also think about the valuation of the stock price,” Hancock said. The quality strategy’s tendency to lean toward large cap stocks and a low turnover strategy makes it “well suited” to the transparent structure of an ETF, Hancock said. The QLTY ETF should see a similar turnover rate of around 20% to what the mutual fund has, he added. The QLTY is a long-only equity fund, meaning it doesn’t bet agaibst stocks by taking short positions. Jeremy Grantham, GMO’s chief investment strategist, is not directly involved in the new ETF. The legendary investor has warned at several points in recent years that the stock market is in a bubble.

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