Wall Street has been struggling this year, buoyed by decades-high inflation, the Russia-Ukraine conflict and Fed’s aggressive tightening policy. Investors have increasingly been concerned that the economy will plunge into recession.
Against such a backdrop, investors should focus on high-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. iShares Edge MSCI USA Quality Factor ETF ( QUAL Quick Quote QUAL - Free Report) , Invesco S&P 500 Quality ETF ( SPHQ Quick Quote SPHQ - Free Report) , ALPS Barron's 400 ETF ( BFOR Quick Quote BFOR - Free Report) , FlexShares Quality Dividend Index Fund ( QDF Quick Quote QDF - Free Report) and SPDR MSCI USA StrategicFactors ETF ( QUS Quick Quote QUS - Free Report) could enjoy smooth trading and generate market-beating returns in the current market environment. The market sell-off aggravated in recent weeks when the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. Fed Chair Jerome Powell said another hike of 50 or 75 bps at the next meeting in July is likely. An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans that will likely cut consumer spending (read: Long/Short ETFs to Consider Amid Market Turmoil). Additionally, the rounds of data suggest a slowdown in economic activity in the key sectors. Mortgage rates reached their highest level in more than 13 years, while retail sales registered a bigger-than-expected drop in May as record gasoline prices prompted households to cut back on spending. With skyrocketing inflation and a weak macroeconomic backdrop, the World Bank has warned of a recession and slashed its global growth forecast. It now expects the global economy to expand 2.9% this year, down from 5.7% growth in 2021 and lower than the 4.1% expectation projected in January. The World Bank cautioned that many countries could fall into recession as the economy slips into a period of stagflation reminiscent of the 1970s. Goldman Sachs forecast a 30% chance of the U.S. economy tipping into recession over the next year, while economists at Morgan Stanley placed the odds of a U.S. recession for the next 12 months at around 35%. iShares Edge MSCI USA Quality Factor ETF ( QUAL Quick Quote QUAL - Free Report) With AUM of $18.5 billion, iShares Edge MSCI USA Quality Factor ETF 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 no more than a 4.1% share. iShares Edge MSCI USA Quality Factor ETF charges 15 bps in annual fees and trades in an average daily volume of 1.7 million shares (read: 5 Recession-Proof ETFs for Your Portfolio). Invesco S&P 500 Quality ETF ( SPHQ Quick Quote SPHQ - Free Report) Invesco S&P 500 Quality ETF 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, Invesco S&P 500 Quality ETF has amassed $3.3 billion in its asset base and trades in an average daily volume of 1.4 million shares. It charges 15 bps in fees per year. ALPS Barron's 400 ETF ( BFOR Quick Quote BFOR - Free Report) With AUM of $120.9 million, ALPS Barron's 400 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. ALPS Barron's 400 ETF holds 421 stocks in its basket, with none making up for more than 0.45% of assets. It charges 65 bps in annual fees and trades in a volume of 7,000 shares per day on average. FlexShares Quality Dividend Index Fund ( QDF Quick Quote QDF - Free Report) FlexShares Quality Dividend Index Fund follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends while maintaining a beta near 1. It is home to 128 stocks in its basket, with none making up for more than 8.1% of assets (read: Dividend Aristocrat ETFs to Stay Afloat Amid Likely Recession). FlexShares Quality Dividend Index Fund has amassed $1.5 billion in its asset base while trades in an average daily volume of 74,000 shares. It charges 37 bps in fees per year from investors. SPDR MSCI USA StrategicFactors ETF ( QUS Quick Quote QUS - Free Report) SPDR MSCI USA StrategicFactors ETF 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 Capped Index. SPDR MSCI USA StrategicFactors ETF holds 626 stocks in its basket, with each accounting for less than 3% share. SPDR MSCI USA StrategicFactors ETF has attracted $785.4 million in its asset base while trading an average daily volume of 39,000 shares. It charges 15 bps in fees per year from investors. Bottom Line
Quality ETFs often provide a 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.