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Quality ETFs Appear Attractive as Fed Rate Hike Nears
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Wall Street has had a slow start in 2022 with the major broad market indices feeling the pressure of rising benchmark 10-year Treasury yields. Also, the release of the minutes from the Federal Reserve’s December meeting, pointed toward tighter monetary policy regulations. The Dow Jones Industrial Average lost 0.4% on Jan 6. The other two broad market indices, the S&P 500 and the Nasdaq composite, also declined about 0.1% each. In fact, the tech-heavy Nasdaq Composite has lost about 4% over the last couple of trading sessions.
The reason for this tech market slowdown can essentially be the soaring benchmark 10-year Treasury yields, which went up as high as above 1.75% on Jan 6 after standing at 1.51% on Dec 31. Growth sectors like the tech space have been feeling the pain of rising bond yields as the same decreases the relative value of future earnings, making the popular stocks seem overvalued. Tech companies also face hurdles in funding their growth and buying back stocks due to higher rates (per a CNBC article).
Investors willing to sail through the current market turbulences from the latest COVID-19-variant-related concerns can consider iShares MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) , FlexShares Quality Dividend Index Fund (QDF - Free Report) , SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) and Barron's 400 ETF (BFOR - Free Report) .
The latest minutes-induced concerns over the Fed reducing its nearly $9 trillion balance sheet in 2022 post the interest rate hike in March this year. In fact, Infrastructure Capital Management CEO Jay Hatfield called the chances of the Fed balance sheet runoff “the key risk for the year,” as mentioned in a CNBC article. He also commented per the same article that “If the Fed starts shrinking the balance sheet that’s going to be disastrous. I assume that they’re going to keep the balance sheet flat, but it is possible if inflation stays really hot that they start letting the balance sheet run off.” Further, the Federal Reserve may take a more aggressive approach to raising interest rates.
The Federal Reserve has already started tapering the bond purchases, which it expects to complete by March this year. The Fed is expected to begin raising its benchmark interest rate in March.
The ISM Manufacturing PMI in the United States slid to 58.7 in December of 2021 from 61.1 in November, lagging market forecasts of 60. The reading highlighted the weakest growth in factory activity since January due to softness in new orders growth (60.4 vs. 61.5).
Quality ETFs Worth a Look
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and healthy margins. These stocks also have a track record of stable or rising sales and earnings growth. In comparison to plain vanilla funds, these products help lower volatility and perform rather well during market uncertainty. Further, academic researches proved that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.
Against such a backdrop, we have highlighted five ETFs targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market scenario.
iShares MSCI USA Quality Factor ETF provides exposure to the 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: 5 Defensive ETF Bets as Omicron Enters the United States).
Invesco S&P 500 Quality ETF tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks that has the highest-quality score based on three fundamental measures, namely, the return on equity, accruals ratio and the financial leverage ratio.
Expense Ratio: 0.15%
AUM: $3.67 billion
FlexShares Quality Dividend Index Fund (QDF - Free Report)
FlexShares Quality Dividend Index Fund seeks investment results that generally correspond to the price and yield performance, before fees and expenses, of the Northern Trust Quality Dividend Index.
SPDR MSCI USA StrategicFactors ETF offers exposure to stocks that combine value, low volatility and quality-factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Capped Index (read: Quality ETFs & Stocks for Likely Faster Fed Tightening & Omicron).
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Quality ETFs Appear Attractive as Fed Rate Hike Nears
Wall Street has had a slow start in 2022 with the major broad market indices feeling the pressure of rising benchmark 10-year Treasury yields. Also, the release of the minutes from the Federal Reserve’s December meeting, pointed toward tighter monetary policy regulations. The Dow Jones Industrial Average lost 0.4% on Jan 6. The other two broad market indices, the S&P 500 and the Nasdaq composite, also declined about 0.1% each. In fact, the tech-heavy Nasdaq Composite has lost about 4% over the last couple of trading sessions.
The reason for this tech market slowdown can essentially be the soaring benchmark 10-year Treasury yields, which went up as high as above 1.75% on Jan 6 after standing at 1.51% on Dec 31. Growth sectors like the tech space have been feeling the pain of rising bond yields as the same decreases the relative value of future earnings, making the popular stocks seem overvalued. Tech companies also face hurdles in funding their growth and buying back stocks due to higher rates (per a CNBC article).
Investors willing to sail through the current market turbulences from the latest COVID-19-variant-related concerns can consider iShares MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) , FlexShares Quality Dividend Index Fund (QDF - Free Report) , SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) and Barron's 400 ETF (BFOR - Free Report) .
The latest minutes-induced concerns over the Fed reducing its nearly $9 trillion balance sheet in 2022 post the interest rate hike in March this year. In fact, Infrastructure Capital Management CEO Jay Hatfield called the chances of the Fed balance sheet runoff “the key risk for the year,” as mentioned in a CNBC article. He also commented per the same article that “If the Fed starts shrinking the balance sheet that’s going to be disastrous. I assume that they’re going to keep the balance sheet flat, but it is possible if inflation stays really hot that they start letting the balance sheet run off.” Further, the Federal Reserve may take a more aggressive approach to raising interest rates.
The Federal Reserve has already started tapering the bond purchases, which it expects to complete by March this year. The Fed is expected to begin raising its benchmark interest rate in March.
The ISM Manufacturing PMI in the United States slid to 58.7 in December of 2021 from 61.1 in November, lagging market forecasts of 60. The reading highlighted the weakest growth in factory activity since January due to softness in new orders growth (60.4 vs. 61.5).
Quality ETFs Worth a Look
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and healthy margins. These stocks also have a track record of stable or rising sales and earnings growth. In comparison to plain vanilla funds, these products help lower volatility and perform rather well during market uncertainty. Further, academic researches proved that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.
Against such a backdrop, we have highlighted five ETFs targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market scenario.
iShares MSCI USA Quality Factor ETF (QUAL - Free Report)
iShares MSCI USA Quality Factor ETF provides exposure to the 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: 5 Defensive ETF Bets as Omicron Enters the United States).
Expense Ratio: 0.15%
AUM: $25.38 billion
Invesco S&P 500 Quality ETF (SPHQ - Free Report)
Invesco S&P 500 Quality ETF tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks that has the highest-quality score based on three fundamental measures, namely, the return on equity, accruals ratio and the financial leverage ratio.
Expense Ratio: 0.15%
AUM: $3.67 billion
FlexShares Quality Dividend Index Fund (QDF - Free Report)
FlexShares Quality Dividend Index Fund seeks investment results that generally correspond to the price and yield performance, before fees and expenses, of the Northern Trust Quality Dividend Index.
Expense Ratio: 0.37%
AUM: $1.73 billion
SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)
SPDR MSCI USA StrategicFactors ETF offers exposure to stocks that combine value, low volatility and quality-factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Capped Index (read: Quality ETFs & Stocks for Likely Faster Fed Tightening & Omicron).
Expense Ratio: 0.15%
AUM: $1.05 billion
Barron's 400 ETF (BFOR - Free Report)
Barron's 400 ETF seeks investment results that generally correspond, before fees and expenses, to the performance of Barron's 400 Index.
Total Operating Expenses: 0.70%
AUM: $158 million