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Bypass the Market Rout With These Quality ETFs

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After a day’s respite on Sep 9, the Wall Street is again witnessing mayhem due to tech selloffs. Dow Jones Industrial Average saw a 1.5% decline on Sep 10. Moreover, the S&P 500 lost 1.8% and the Nasdaq Composite was down 2% on the same day. This downturn, induced by the sharp sell-off in technology stocks, could have been a result of people rushing to book profits, probably due to worries over very high valuations, uncertainty over another pandemic stimulus package, budget negotiations and the approaching elections.

Notably, investors might also blame the seasonal phenomenon here. September is historically considered the worst month for the stock market. Per the LPL Financial data in a Yahoo Finance article, the S&P 500 has fallen about 1% on average in September since 1950.

The coronavirus pandemic continues to spread in the United States as the economy is seeing an improvement in outlook. The United States alone has recorded more than 6.3 million cases and a death toll of more than 191,000.

Meanwhile, in a historic move, the chief executives of nine drug companies have signed a joint pledge to not submit vaccine candidates for FDA approval before the successful demonstration of the safety and efficacy in large clinical trials. The companies signing the pledge included AstraZeneca (AZN), Johnson & Johnson (JNJ), Merck (MRCK), Moderna (MRNA) and Novavax (NVAX) along with those which are working in collaboration -- Pfizer (PFE) and BioNTech, and Sanofi (SNY) and GlaxoSmithKline (GSK). The pledge from the vaccine developers might lead to a delay in the release of the much-awaited coronavirus vaccines.

Also, AstraZeneca, which is developing the coronavirus vaccine in partnership with Oxford University, recently put a hold on global trials, including the late-stage trials. Some unexplained illness observed in a study participant is being considered the reason behind it.  Notably, the company is one of the three vaccine developers to begin the Phase 3 trials, which were being conducted in the United States, Britain, Brazil and South Africa. This again has sparked fears among investors regarding the uncertainty of a vaccine introduction.

Investors also seem to be worried about the approaching U.S. Presidential elections. Thus, with elections approaching, investors need to prepare for increased volatility in the broader equities space. Notably, this election year could be worse as the coronavirus outbreak continues to spread.

It is being believed that the earnings results in the third and fourth quarter of the ongoing year might not be as impressive as the second quarter as most analysts have already adjusted estimates.

Furthermore, tensions are building between the world’s two largest economies again. China recently launched a global data security initiative mentioning principles that should be adhered to in areas ranging from personal information to espionage, per a CNBC article. The move is in response to United States’ consistent pressure on China’s largest technology companies. Also, President Trump is seeking to restrict U.S. ties with China. In this regard, it is threatening to punish any American company that creates jobs overseas and forbids those that do business in China through federal contracts. The Trump administration is also considering another ban on China’s cotton, per the sources.

Factors Instilling Optimism

A slew of encouraging data indicating that the U.S. economy is gradually returning to the pre-pandemic level is instilling optimism among investors. In fact, the latest jobs data, which showed that the economy added 1.4 million jobs in August and unemployment rate dropped to 8.4% from 10.2%, is an indication of an improving economy. Encouragingly, about half the jobs that were lost during the pandemic have been recovered.

The third quarter has witnessed the rise in U.S. manufacturing activity to nearly a two-year high in August owing to solid new orders. Per the Institute for Supply Management’s (ISM) Sep 1 statement, the index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. Economists polled by Reuters forecast a rise in the index to 54.5 in August.

Moreover, the Commerce Department recently reported that new orders for U.S. manufactured goods rose for the third consecutive month in July by 6.4%. The uptick in July not only surpassed the consensus estimate of 5.6% but also matched the upwardly revised spike in June.

Also, considering the support from the central bank and hopes of a further stimulus by the Congress, the industrial sector is expected to fare well in the near term. Moreover, the central bank recently announced a new strategy to revive the full-employment scenario to its pre-COVID levels in the United States and drive inflation back to a decent degree. Under the new scheme, the Fed will try and achieve inflation at 2%, on average, mitigating the below-2% phase with higher inflation "for some time." The change in the Fed’s tone suggests that its key overnight interest rate will remain at rock bottom in the medium term as the central bank is striving to drive inflation.

Brave the Market Rout With Quality ETFs

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. They also have a track record of stable or rising sales and earnings growth. In comparison to plain vanilla funds, these products help in lowering volatility and perform rather well during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.

Given this, we have highlighted five ETFs targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.

iShares 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: Prepare for Volatility & Inflation with These ETFs).

Expense Ratio: 0.15%

AUM: $19.13 billion

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 (read: Bet on Quality ETFs for a Volatile Market).

Expense Ratio: 0.15%

AUM: $2.19 billion

FlexShares Quality Dividend Index Fund (QDF - Free Report)

This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Dividend Index.

Expense Ratio: 0.37%

AUM: $1.32 billion

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: $736.4 million

Barron's 400 ETF (BFOR - Free Report)

This ETF seeks investment results that correspond generally, before fees and expenses, to the performance of the Barron's 400 Index.

Expense Ratio: 0.66%

AUM: $106 million

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