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After hitting fresh highs on speedy economic recovery bets, Wall Street has been showing weakness lately as negative fundamentals have started building up.
Firstly, inflationary pressures have been rising, resulting in surging yields and in turn fears of overvaluation, leading to a sell-off in the high-beta and high-growth stocks. Secondly, Biden’s first major federal tax hike proposal since 1993 made investors jittery. The tax hike plan will weigh on companies’ earnings and equity allocations in the short term.
Biden is widely expected to raise the corporate tax rate to 28% from 21% but keep it below the pre-Trump level of 35%. The new administration is also looking to increase the top marginal tax rate to 39.6% from 37% and taxing capital gains and dividends at a higher ordinary income tax rate. Goldman strategists expect higher corporate taxes to cut the S&P 500 earnings by 3% in 2022 while a JPMorgan Chase team also projects it to be a “drag on earnings growth and buybacks (read: ETFs to Follow If Tax Hike Comes After $1.9-T Biden Stimulus).”
Additionally, the third wave of coronavirus has hit Europe hard with extension of lockdown measures in several countries. India has also been reporting rising virus cases despite vaccinations. The resurgence of the infection could have an impact on Wall Street in the coming weeks. Further, the latest comments from Fed Chairman Jerome Powell are also weighing on investors’ sentiment. The central bank said that it would gradually roll back its monthly bond purchases as the economy continues to improve. The Fed currently purchases $120 billion in bonds per month (read: 5 Safe ETFs to Play as Coronavirus Cases Rise Globally).
However, rapid COVID-19 vaccinations, progress on more vaccines and an unprecedented stimulus have been the major catalysts for the stock market. President Joe Biden this month signed a massive $1.9 trillion new stimulus. The rounds of solid upbeat economic data indicate stronger-than-expected recovery.
The United States added 379,000 jobs — the highest since October — in February while unemployment fell to 6.2%. U.S. manufacturing activity increased to a three-year high last month with acceleration in new orders. Consumer spending rose the most in seven months in January while construction spending surged to a record high, boosted by strong private and public outlays. Strong corporate earnings as well as signs of a healing labor market also bode well for economic growth.
With strong federal fiscal support and continued progress on vaccination, the Fed lifted GDP growth projection from 4.2% to 6.5% for this year — the strongest growth in nearly 40 years.
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 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 targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.
With AUM of $19.4 billion, 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. It holds 125 stocks in its basket with each making up for no more than 4.2% share. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.4 million shares (read: Worried About Tax Hike and Surging Yields? 5 ETFs to Bet On).
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. Holding 99 stocks in its basket, the ETF has amassed $2.4 billion in its asset base and trades in an average daily volume of 412,000 shares. It charges 15 bps in fees per year.
With AUM of $132.3 million, 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. The product holds 397 stocks in its basket with none making up for more than 0.31% of assets. It charges 65 bps in annual fees and trades in volume of 6,000 shares per day on average.
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. It is home to 131 stocks in its basket with none making up for more than 7.4% of assets. The fund has amassed $1.5 billion in its asset base while trades in an average daily volume of 51,000 shares. It charges 37 bps in fees per year from investors (read: US Dividends Jump to Record High Amid Pandemic: ETFs to Tap).
This fund offers exposure to stocks that have a combination of low volatility, quality and value factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index. It holds 619 stocks in its basket with each accounting for less than 3% share. QUS has attracted $875 million in its asset base while trades in an average daily volume of 34,000 shares. It charges 15 bps in fees per year from investors.
Bottom Line
Quality ETFs 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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5 Solid Quality ETFs to Buy Now
After hitting fresh highs on speedy economic recovery bets, Wall Street has been showing weakness lately as negative fundamentals have started building up.
Firstly, inflationary pressures have been rising, resulting in surging yields and in turn fears of overvaluation, leading to a sell-off in the high-beta and high-growth stocks. Secondly, Biden’s first major federal tax hike proposal since 1993 made investors jittery. The tax hike plan will weigh on companies’ earnings and equity allocations in the short term.
Biden is widely expected to raise the corporate tax rate to 28% from 21% but keep it below the pre-Trump level of 35%. The new administration is also looking to increase the top marginal tax rate to 39.6% from 37% and taxing capital gains and dividends at a higher ordinary income tax rate. Goldman strategists expect higher corporate taxes to cut the S&P 500 earnings by 3% in 2022 while a JPMorgan Chase team also projects it to be a “drag on earnings growth and buybacks (read: ETFs to Follow If Tax Hike Comes After $1.9-T Biden Stimulus).”
Additionally, the third wave of coronavirus has hit Europe hard with extension of lockdown measures in several countries. India has also been reporting rising virus cases despite vaccinations. The resurgence of the infection could have an impact on Wall Street in the coming weeks. Further, the latest comments from Fed Chairman Jerome Powell are also weighing on investors’ sentiment. The central bank said that it would gradually roll back its monthly bond purchases as the economy continues to improve. The Fed currently purchases $120 billion in bonds per month (read: 5 Safe ETFs to Play as Coronavirus Cases Rise Globally).
However, rapid COVID-19 vaccinations, progress on more vaccines and an unprecedented stimulus have been the major catalysts for the stock market. President Joe Biden this month signed a massive $1.9 trillion new stimulus. The rounds of solid upbeat economic data indicate stronger-than-expected recovery.
The United States added 379,000 jobs — the highest since October — in February while unemployment fell to 6.2%. U.S. manufacturing activity increased to a three-year high last month with acceleration in new orders. Consumer spending rose the most in seven months in January while construction spending surged to a record high, boosted by strong private and public outlays. Strong corporate earnings as well as signs of a healing labor market also bode well for economic growth.
With strong federal fiscal support and continued progress on vaccination, the Fed lifted GDP growth projection from 4.2% to 6.5% for this year — the strongest growth in nearly 40 years.
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 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 targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.
iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)
With AUM of $19.4 billion, 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. It holds 125 stocks in its basket with each making up for no more than 4.2% share. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.4 million shares (read: Worried About Tax Hike and Surging Yields? 5 ETFs to Bet On).
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. Holding 99 stocks in its basket, the ETF has amassed $2.4 billion in its asset base and trades in an average daily volume of 412,000 shares. It charges 15 bps in fees per year.
Barron's 400 ETF (BFOR - Free Report)
With AUM of $132.3 million, 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. The product holds 397 stocks in its basket with none making up for more than 0.31% of assets. It charges 65 bps in annual fees and trades in volume of 6,000 shares per day on average.
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. It is home to 131 stocks in its basket with none making up for more than 7.4% of assets. The fund has amassed $1.5 billion in its asset base while trades in an average daily volume of 51,000 shares. It charges 37 bps in fees per year from investors (read: US Dividends Jump to Record High Amid Pandemic: ETFs to Tap).
SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)
This fund offers exposure to stocks that have a combination of low volatility, quality and value factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index. It holds 619 stocks in its basket with each accounting for less than 3% share. QUS has attracted $875 million in its asset base while trades in an average daily volume of 34,000 shares. It charges 15 bps in fees per year from investors.
Bottom Line
Quality ETFs 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 >>