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Here's Why You Should Bet on Quality ETFs & Stocks
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Though Wall Street is showing immense strength with major indices hovering near record highs, the coronavirus outbreak is affecting the stocks. This is especially true as the epidemic is expected to have a negative impact on global growth and corporate profits.
However, China and central banks around the world are stepping up efforts to curtail the economic damage caused by the epidemic by injecting cash into markets, lowering interest rates and introducing other stimulus measures. Additionally, the initial U.S.-China trade deal and better-than-expected earnings are driving the stocks higher.
Meanwhile, the U.S. economy has been resilient and could continue to grow moderately this year. The labor market was off to a strong start in 2020, creating 225,000 new jobs in January. The manufacturing sector, which had languished in contraction territory for five months, rebounded strongly in January while services sector activity also picked up, with industries reporting increase in new orders. Retail sales also strengthened for a fourth consecutive month and homebuilder sentiment is hovering near the highest level since 1999 (read: 3 Sector ETFs & Stocks to Win on Upbeat January Jobs Data).
Further, better-than-expected corporate earnings for the fourth quarter have bolstered investors’ sentiment. Earnings for 88.6% of the S&P 500 market capitalization are up 1.1% year over year on 4.6% higher revenues, with 73% beating on earnings and 65.7% surpassing revenue estimates. While the proportion of companies beating earnings estimates is tracking below the same group a year ago, the revenue beat percentage is notably above historical periods.
Against such a backdrop, investors should focus on high-quality investing.
Why Quality Investing?
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
Given this, we have highlighted five ETFs & stocks targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.
This fund provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index (read: January Sends Warning for 2020: Play Quality ETFs & Stocks).
Expense Ratio: 0.15% AUM: $17.9 billion Average Daily Volume: 1 million shares
This fund tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks that have the highest-quality score based on three fundamental measures — return on equity, accruals ratio and financial leverage ratio.
This ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark uses the MarketGrader's fundamental analysis to select America’s highest-performing stocks based on growth, valuation, profitability and cash flow.
Expense Ratio: 0.66% AUM: $140.5 million Average Daily Volume: 11,000 shares
FlexShares Quality Dividend Index Fund (QDF - Free Report)
This fund offers exposure to stocks that have a combination of value, low volatility and quality factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index.
Expense Ratio: 0.15% AUM: $749 million Average Daily Volume: 50,000 shares
Stock Picks
To find out the best stocks in this space, we have used the Zacks Stock Screener. The parameters include a Zacks Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, double-digit current-year EPS growth, positive current-year earnings estimate revisions over the past 30 days and dividend yield of greater than 1%.
It is engaged in homebuilding and financial service businesses in the United States.
Zacks Rank: #1 VGM Score: B ROE: 14.11% Debt/Equity: 0.64 5 Year Historical EPS Growth: 35.58% Fiscal Year Earnings Growth: 17.20% Positive Earnings Estimate Revisions Over 30 Days: 3.52% Dividend Yield: 2.92%
Bottom Line
Quality ETFs and stocks often provide hedge against market volatility. Adding any of the above-mentioned products to one’s long-term portfolio could be a good move given their credit worthiness and soundness.
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Here's Why You Should Bet on Quality ETFs & Stocks
Though Wall Street is showing immense strength with major indices hovering near record highs, the coronavirus outbreak is affecting the stocks. This is especially true as the epidemic is expected to have a negative impact on global growth and corporate profits.
However, China and central banks around the world are stepping up efforts to curtail the economic damage caused by the epidemic by injecting cash into markets, lowering interest rates and introducing other stimulus measures. Additionally, the initial U.S.-China trade deal and better-than-expected earnings are driving the stocks higher.
Meanwhile, the U.S. economy has been resilient and could continue to grow moderately this year. The labor market was off to a strong start in 2020, creating 225,000 new jobs in January. The manufacturing sector, which had languished in contraction territory for five months, rebounded strongly in January while services sector activity also picked up, with industries reporting increase in new orders. Retail sales also strengthened for a fourth consecutive month and homebuilder sentiment is hovering near the highest level since 1999 (read: 3 Sector ETFs & Stocks to Win on Upbeat January Jobs Data).
Further, better-than-expected corporate earnings for the fourth quarter have bolstered investors’ sentiment. Earnings for 88.6% of the S&P 500 market capitalization are up 1.1% year over year on 4.6% higher revenues, with 73% beating on earnings and 65.7% surpassing revenue estimates. While the proportion of companies beating earnings estimates is tracking below the same group a year ago, the revenue beat percentage is notably above historical periods.
Against such a backdrop, investors should focus on high-quality investing.
Why Quality Investing?
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
Given this, we have highlighted five ETFs & stocks targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.
ETF Picks
iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)
This fund provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index (read: January Sends Warning for 2020: Play Quality ETFs & Stocks).
Expense Ratio: 0.15%
AUM: $17.9 billion
Average Daily Volume: 1 million shares
Invesco S&P 500 Quality ETF (SPHQ - Free Report)
This fund tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks that have the highest-quality score based on three fundamental measures — return on equity, accruals ratio and financial leverage ratio.
Expense Ratio: 0.15%
AUM: $1.8 billion
Average Daily Volume: 353,000 shares
Barron's 400 ETF (BFOR - Free Report)
This ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark uses the MarketGrader's fundamental analysis to select America’s highest-performing stocks based on growth, valuation, profitability and cash flow.
Expense Ratio: 0.66%
AUM: $140.5 million
Average Daily Volume: 11,000 shares
FlexShares Quality Dividend Index Fund (QDF - Free Report)
This ETF follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends while maintaining a beta near 1 (read: Economic Slowdown in 2020? ETF Strategies to Help You).
Expense Ratio: 0.37%
AUM: $1.8 billion
Average Daily Volume: 77,000 shares
SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)
This fund offers exposure to stocks that have a combination of value, low volatility and quality factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index.
Expense Ratio: 0.15%
AUM: $749 million
Average Daily Volume: 50,000 shares
Stock Picks
To find out the best stocks in this space, we have used the Zacks Stock Screener. The parameters include a Zacks Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, double-digit current-year EPS growth, positive current-year earnings estimate revisions over the past 30 days and dividend yield of greater than 1%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Primerica Inc. (PRI - Free Report)
It provides financial products to middle income households in the United States and Canada.
Zacks Rank: #2
VGM Score: B
ROE: 22.52%
Debt/Equity: 0.03
5 Year Historical EPS Growth: 23.41%
Fiscal Year Earnings Growth: 12.46%
Positive Earnings Estimate Revisions Over 30 Days: 1.9%
Dividend Yield: 1%
Federated Hermes Inc. (FHI - Free Report)
This is a publicly owned asset management holding company.
Zacks Rank: #1
VGM Score: B
ROE: 28.65%
Debt/Equity: 0.10
5 Year Historical EPS Growth: 12.51%
Fiscal Year Earnings Growth: 15.61%
Positive Earnings Estimate Revisions Over 30 Days: 7.34%
Dividend Yield: 2.95%
PulteGroup Inc. (PHM - Free Report)
This homebuilding company is engaged in the homebuilding and financial services businesses, primarily in the United States (read: ETFs to Gain as Homebuilders Confidence is Near All-Time High).
Zacks Rank: #1
VGM Score: A
ROE: 19.38%
Debt/Equity: 0.51
5 Year Historical EPS Growth: 33.03%
Fiscal Year Earnings Growth: 17.19%
Positive Earnings Estimate Revisions Over 30 Days: 5.38%
Dividend Yield: 1.03%
State Street Corporation (STT - Free Report)
This financial holding company provides a range of products and services for institutional investors worldwide through its subsidiaries.
Zacks Rank: #1
VGM Score: B
ROE: 11.79%
Debt/Equity: 0.58
5 Year Historical EPS Growth: 7.88%
Fiscal Year Earnings Growth: 12.32%
Positive Earnings Estimate Revisions Over 30 Days: 1.24%
Dividend Yield: 2.64%
M.D.C. Holdings Inc. (MDC - Free Report)
It is engaged in homebuilding and financial service businesses in the United States.
Zacks Rank: #1
VGM Score: B
ROE: 14.11%
Debt/Equity: 0.64
5 Year Historical EPS Growth: 35.58%
Fiscal Year Earnings Growth: 17.20%
Positive Earnings Estimate Revisions Over 30 Days: 3.52%
Dividend Yield: 2.92%
Bottom Line
Quality ETFs and stocks often provide hedge against market volatility. Adding any of the above-mentioned products to one’s long-term portfolio could be a good move given their credit worthiness and soundness.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>