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After hitting a series of fresh highs, Wall Street caught in uncertainty brought about by concerns over the sustainability of economic recovery. This is especially true as the highly contagious Delta variant of coronavirus is spreading rapidly in the United States with the lowest vaccination rates such as Alabama, Arkansas, Louisiana and Mississippi, according to the U.S. Centers for Disease Control and Prevention (CDC) as well as elsewhere around the world.
The health experts quoted on CNBC that the country, which just celebrated the Fourth of July with some of its first large gatherings in more than a year, is headed toward a “dangerous” fall season when delta is expected to cause another surge in new coronavirus cases. The World Health Organization urged caution on reopenings worldwide with most regions seeing a rise in case counts. It puts emphasis on “reintroduction of indoor mask mandates, distancing and occupancy limits” in certain parts of the country in the coming months (read: 4 ETF Zones to Invest in As Volatility Spikes).
There are about 1,000 counties in the United States with COVID-19 vaccination coverage of less than 30%, mostly located in the Southeast and Midwest. Per the latest CDC data, less than half of the country — about 158 million people — has been fully vaccinated. About 42% of its residents are fully inoculated in Texas, the second-most-populated state behind California.
Many scientists projects COVID-19 to continue spreading around the world for at least the next two to three years, requiring nations to reinstitute public health measures on an ad hoc basis. Authorities in Australia, South Africa and Asia have recently reintroduced curfews or other measures to curb rising delta outbreaks. Japan has declared a coronavirus state of emergency in Tokyo and banned spectators at the Olympics.
However, the economy has shown strong recovery from the pandemic lows driven by rapid vaccine rollouts, an expanded stimulus, a healing job market and earnings growth that have led to higher activities across all sectors and categories. Additionally, inflation concerns have been eased with the latest Fed minutes, which indicate that officials may not be ready yet to tighten policy (read: 5 Top-Ranked ETFs to Buy on Dovish Fed Minutes).
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. Academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
In its research, BlackRock CIO of U.S. fundamental equities Tony DeSpirito revealed that quality stocks are trading at their largest valuation discount to the broad market since the dot com bubble of the early 2000s. This is because these stocks have underperformed since COVID-19 vaccine announcements in November 2020. Investors have largely avoided or sold these stocks in favor of the riskier bets that produced strong gains early in the recovery.
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 $21.9 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 4.8% share. The ETF charges 15 bps in annual fees and trades in an average daily volume of 847,000 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. Holding 102 stocks in its basket, the ETF has amassed $3 billion in its asset base and trades in an average daily volume of 435,000 shares. It charges 15 bps in fees per year (read: 5 Winning ETF Strategies for the Second Half).
With AUM of $141.9 million, this ETF follows the Barron's 400 Index, which offers investors exposure to the high-performing securities of U.S. companies. It uses MarketGrader's fundamental analysis to select the stocks based on the strength of their fundamentals in growth, value, profitability and cash flow and then screens such components for certain criteria regarding concentration, market capitalization and liquidity. The product holds 399 stocks in its basket with none making up for more than 0.4% of assets. It charges 65 bps in annual fees and trades in a volume of 4,000 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 130 stocks in its basket with none making up for more than 8.1% of assets. The fund has amassed $1.6 billion in its asset base while trades in an average daily volume of 34,000 shares. It charges 37 bps in fees per year from investors (read: Dividend Aristocrat ETFs That Deserve a Spot in Your Portfolio).
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 622 stocks in its basket with each accounting for less than 3.1% share. QUS has attracted $964.1 million in its asset base while trades in an average daily volume of 24,000 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 Quality ETFs to Buy Now
After hitting a series of fresh highs, Wall Street caught in uncertainty brought about by concerns over the sustainability of economic recovery. This is especially true as the highly contagious Delta variant of coronavirus is spreading rapidly in the United States with the lowest vaccination rates such as Alabama, Arkansas, Louisiana and Mississippi, according to the U.S. Centers for Disease Control and Prevention (CDC) as well as elsewhere around the world.
The health experts quoted on CNBC that the country, which just celebrated the Fourth of July with some of its first large gatherings in more than a year, is headed toward a “dangerous” fall season when delta is expected to cause another surge in new coronavirus cases. The World Health Organization urged caution on reopenings worldwide with most regions seeing a rise in case counts. It puts emphasis on “reintroduction of indoor mask mandates, distancing and occupancy limits” in certain parts of the country in the coming months (read: 4 ETF Zones to Invest in As Volatility Spikes).
There are about 1,000 counties in the United States with COVID-19 vaccination coverage of less than 30%, mostly located in the Southeast and Midwest. Per the latest CDC data, less than half of the country — about 158 million people — has been fully vaccinated. About 42% of its residents are fully inoculated in Texas, the second-most-populated state behind California.
Many scientists projects COVID-19 to continue spreading around the world for at least the next two to three years, requiring nations to reinstitute public health measures on an ad hoc basis. Authorities in Australia, South Africa and Asia have recently reintroduced curfews or other measures to curb rising delta outbreaks. Japan has declared a coronavirus state of emergency in Tokyo and banned spectators at the Olympics.
However, the economy has shown strong recovery from the pandemic lows driven by rapid vaccine rollouts, an expanded stimulus, a healing job market and earnings growth that have led to higher activities across all sectors and categories. Additionally, inflation concerns have been eased with the latest Fed minutes, which indicate that officials may not be ready yet to tighten policy (read: 5 Top-Ranked ETFs to Buy on Dovish Fed Minutes).
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. Academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
In its research, BlackRock CIO of U.S. fundamental equities Tony DeSpirito revealed that quality stocks are trading at their largest valuation discount to the broad market since the dot com bubble of the early 2000s. This is because these stocks have underperformed since COVID-19 vaccine announcements in November 2020. Investors have largely avoided or sold these stocks in favor of the riskier bets that produced strong gains early in the recovery.
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 $21.9 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 4.8% share. The ETF charges 15 bps in annual fees and trades in an average daily volume of 847,000 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. Holding 102 stocks in its basket, the ETF has amassed $3 billion in its asset base and trades in an average daily volume of 435,000 shares. It charges 15 bps in fees per year (read: 5 Winning ETF Strategies for the Second Half).
Barron's 400 ETF (BFOR - Free Report)
With AUM of $141.9 million, this ETF follows the Barron's 400 Index, which offers investors exposure to the high-performing securities of U.S. companies. It uses MarketGrader's fundamental analysis to select the stocks based on the strength of their fundamentals in growth, value, profitability and cash flow and then screens such components for certain criteria regarding concentration, market capitalization and liquidity. The product holds 399 stocks in its basket with none making up for more than 0.4% of assets. It charges 65 bps in annual fees and trades in a volume of 4,000 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 130 stocks in its basket with none making up for more than 8.1% of assets. The fund has amassed $1.6 billion in its asset base while trades in an average daily volume of 34,000 shares. It charges 37 bps in fees per year from investors (read: Dividend Aristocrat ETFs That Deserve a Spot in Your Portfolio).
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 622 stocks in its basket with each accounting for less than 3.1% share. QUS has attracted $964.1 million in its asset base while trades in an average daily volume of 24,000 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 >>