QUAL vs. VMBS: What’s The Difference?

The iShares MSCI USA Quality Factor ETF (QUAL) and the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) are both among the Top 100 ETFs. QUAL is a iShares Large Blend fund and VMBS is a Vanguard Intermediate Government fund. So, what’s the difference between QUAL and VMBS? And which fund is better?

The expense ratio of QUAL is 0.10 percentage points higher than VMBS’s (0.15% vs. 0.05%). QUAL also has a high exposure to the technology sector while VMBS is mostly comprised of AAA bonds. Overall, QUAL has provided higher returns than VMBS over the past 7 years.

In this article, we’ll compare QUAL vs. VMBS. We’ll look at fund composition and risk metrics, as well as at their industry exposure and performance. Moreover, I’ll also discuss QUAL’s and VMBS’s portfolio growth, annual returns, and holdings and examine how these affect their overall returns.

Summary

QUAL VMBS
Name iShares MSCI USA Quality Factor ETF Vanguard Mortgage-Backed Securities Index Fund ETF Shares
Category Large Blend Intermediate Government
Issuer iShares Vanguard
AUM 23.93B 16.61B
Avg. Return 13.42% 2.89%
Div. Yield 1.29% 1.23%
Expense Ratio 0.15% 0.05%

The iShares MSCI USA Quality Factor ETF (QUAL) is a Large Blend fund that is issued by iShares. It currently has 23.93B total assets under management and has yielded an average annual return of 13.42% over the past 10 years. The fund has a dividend yield of 1.29% with an expense ratio of 0.15%.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) is a Intermediate Government fund that is issued by Vanguard. It currently has 16.61B total assets under management and has yielded an average annual return of 2.89% over the past 10 years. The fund has a dividend yield of 1.23% with an expense ratio of 0.05%.

QUAL’s dividend yield is 0.06% higher than that of VMBS (1.29% vs. 1.23%). Also, QUAL yielded on average 10.53% more per year over the past decade (13.42% vs. 2.89%). The expense ratio of QUAL is 0.10 percentage points higher than VMBS’s (0.15% vs. 0.05%).

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Fund Composition

Holdings

QUAL - Holdings

QUAL Holdings Weight
Facebook Inc Class A 4.77%
Nike Inc Class B 4.05%
Microsoft Corp 3.54%
Apple Inc 3.52%
Johnson & Johnson 2.99%
BlackRock Inc 2.87%
Target Corp 2.8%
Mastercard Inc Class A 2.72%
NVIDIA Corp 2.71%
Alphabet Inc Class A 2.49%

QUAL’s Top Holdings are Facebook Inc Class A, Nike Inc Class B, Microsoft Corp, Apple Inc, and Johnson & Johnson at 4.77%, 4.05%, 3.54%, 3.52%, and 2.99%.

BlackRock Inc (2.87%), Target Corp (2.8%), and Mastercard Inc Class A (2.72%) have a slightly smaller but still significant weight. NVIDIA Corp and Alphabet Inc Class A are also represented in the QUAL’s holdings at 2.71% and 2.49%.

VMBS - Holdings

VMBS Bond Sectors Weight
AAA 100.01%
Below B 0.0%
B 0.0%
BB 0.0%
BBB 0.0%
A 0.0%
AA 0.0%
US Government 0.0%
Others -0.01%

VMBS’s Top Bond Sectors are ratings of AAA, Below B, B, BB, and BBB at 100.01%, 0.0%, 0.0%, 0.0%, and 0.0%. The fund is less weighted towards A (0.0%), AA (0.0%), and US Government (0.0%) rated bonds.

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Risk Analysis

QUAL VMBS
Mean Return 0 0.21
R-squared 0 65.78
Std. Deviation 0 2.02
Alpha 0 0.37
Beta 0 0.54
Sharpe Ratio 0 0.94
Treynor Ratio 0 3.47

The iShares MSCI USA Quality Factor ETF (QUAL) has a Sharpe Ratio of 0 with a Alpha of 0 and a Standard Deviation of 0. Its Mean Return is 0 while QUAL’s R-squared is 0. Furthermore, the fund has a Beta of 0 and a Treynor Ratio of 0.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) has a Alpha of 0.37 with a Beta of 0.54 and a Standard Deviation of 2.02. Its Mean Return is 0.21 while VMBS’s Treynor Ratio is 3.47. Furthermore, the fund has a Sharpe Ratio of 0.94 and a R-squared of 65.78.

QUAL’s Mean Return is 0.21 points lower than that of VMBS and its R-squared is 65.78 points lower. With a Standard Deviation of 0, QUAL is slightly less volatile than VMBS. The Alpha and Beta of QUAL are 0.37 points lower and 0.54 points lower than VMBS’s Alpha and Beta.

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Performance

Annual Returns

QUAL vs. VMBS - Annual Returns

Year QUAL VMBS
2020 16.96% 3.77%
2019 34.14% 6.17%
2018 -5.77% 0.87%
2017 22.26% 2.37%
2016 9.18% 1.43%
2015 5.56% 1.43%
2014 11.62% 5.81%
2013 0.0% -1.28%
2012 0.0% 2.47%
2011 0.0% 5.89%
2010 0.0% 5.24%

QUAL had its best year in 2019 with an annual return of 34.14%. QUAL’s worst year over the past decade yielded -5.77% and occurred in 2018. In most years the iShares MSCI USA Quality Factor ETF provided moderate returns such as in 2010, 2015, and 2016 where annual returns amounted to 0.0%, 5.56%, and 9.18% respectively.

The year 2019 was the strongest year for VMBS, returning 6.17% on an annual basis. The poorest year for VMBS in the last ten years was 2013, with a yield of -1.28%. Most years the Vanguard Mortgage-Backed Securities Index Fund ETF Shares has given investors modest returns, such as in 2017, 2012, and 2020, when gains were 2.37%, 2.47%, and 3.77% respectively.

Portfolio Growth

QUAL vs. VMBS - Portfolio Growth

Fund Initial Balance Final Balance CAGR
QUAL $10,000 $23,251 13.42%
VMBS $10,000 $12,384 2.89%

A $10,000 investment in QUAL would have resulted in a final balance of $23,251. This is a profit of $13,251 over 7 years and amounts to a compound annual growth rate (CAGR) of 13.42%.

With a $10,000 investment in VMBS, the end total would have been $12,384. This equates to a $2,384 profit over 7 years and a compound annual growth rate (CAGR) of 2.89%.

QUAL’s CAGR is 10.53 percentage points higher than that of VMBS and as a result, would have yielded $10,867 more on a $10,000 investment. Thus, QUAL outperformed VMBS by 10.53% annually.


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