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After a good start to the third quarter, Wall Street has been on a volatile ride once again as fears of an aggressive rate hike by the Fed and global growth concerns resurfaced (read: Inverse ETFs Rally on Stocks' Worst Drop Since June 2020).
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 - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) , ALPS Barron's 400 ETF (BFOR - Free Report) , FlexShares Quality Dividend Index Fund (QDF - Free Report) and SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) could enjoy smooth trading and generate market-beating returns in the current market environment.
Current Market Trends
U.S. stocks saw the biggest bloodbath in two years this week, following the hotter-than-expected inflation data. The consumer price index climbed 8.3% year over year in August, down from an 8.5% rise in July but above the 8.1% increase expected by analysts. Inflation also rose 0.1% from July, dashing investors’ hopes that price pressure would weaken and allow the Fed to slow its pace of interest rate increases in the coming months (read: 4 ETFs to Gain From Hotter-Than-Expected Inflation).
The central bank is expected to lift interest rates by 75 bps in the Sep 20-21 meeting to tame inflation. Jerome Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” to curb high inflation. While a tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.
The unexpected high inflation report could prompt the Fed to continue its aggressive hikes longer than anticipated. Wall Street's big fear is that higher rates will eventually lead to an economic slowdown or even a recession.
Bouts of weak economic data across the globe also added to global slowdown fears. U.S. mortgage rates topped 6% for the first time since 2008, signaling that the hot housing market is cooling rapidly. Meanwhile, economic activity in China, the world's second-largest economy, has been declining and the property sector is also suffering. Eurozone inflation for August also rose to another record high.
With AUM of $19.3 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 4.4% share.
iShares Edge MSCI USA Quality Factor ETF charges 15 bps in annual fees and trades in an average daily volume of 1.1 million shares.
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 $3.6 billion in its asset base and trades in an average daily volume of 684,000 shares. It charges 15 bps in fees per year.
With AUM of $133.4 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 400 stocks in its basket, with none making up for more than 0.55% of assets. It charges 65 bps in annual fees and trades in a volume of 3,000 shares per day on average.
FlexShares Quality Dividend Index Fund (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 130 stocks in its basket, with none making up for more than 8.8% of assets (read: IMF Cuts Global Growth Forecast: ETF Strategies to Win).
FlexShares Quality Dividend Index Fund has amassed $1.6 billion in its asset base while it trades in an average daily volume of 61,000 shares. It charges 37 bps in fees per year from investors.
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 628 stocks in its basket, with each accounting for less than 3.3% share.
SPDR MSCI USA StrategicFactors ETF has attracted $892.6 million in its asset base while trading an average daily volume of 33,000 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.
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Invest in Quality ETFs to Fight Volatility
After a good start to the third quarter, Wall Street has been on a volatile ride once again as fears of an aggressive rate hike by the Fed and global growth concerns resurfaced (read: Inverse ETFs Rally on Stocks' Worst Drop Since June 2020).
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 - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) , ALPS Barron's 400 ETF (BFOR - Free Report) , FlexShares Quality Dividend Index Fund (QDF - Free Report) and SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) could enjoy smooth trading and generate market-beating returns in the current market environment.
Current Market Trends
U.S. stocks saw the biggest bloodbath in two years this week, following the hotter-than-expected inflation data. The consumer price index climbed 8.3% year over year in August, down from an 8.5% rise in July but above the 8.1% increase expected by analysts. Inflation also rose 0.1% from July, dashing investors’ hopes that price pressure would weaken and allow the Fed to slow its pace of interest rate increases in the coming months (read: 4 ETFs to Gain From Hotter-Than-Expected Inflation).
The central bank is expected to lift interest rates by 75 bps in the Sep 20-21 meeting to tame inflation. Jerome Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” to curb high inflation. While a tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.
The unexpected high inflation report could prompt the Fed to continue its aggressive hikes longer than anticipated. Wall Street's big fear is that higher rates will eventually lead to an economic slowdown or even a recession.
Bouts of weak economic data across the globe also added to global slowdown fears. U.S. mortgage rates topped 6% for the first time since 2008, signaling that the hot housing market is cooling rapidly. Meanwhile, economic activity in China, the world's second-largest economy, has been declining and the property sector is also suffering. Eurozone inflation for August also rose to another record high.
iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)
With AUM of $19.3 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 4.4% share.
iShares Edge MSCI USA Quality Factor ETF charges 15 bps in annual fees and trades in an average daily volume of 1.1 million shares.
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 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 $3.6 billion in its asset base and trades in an average daily volume of 684,000 shares. It charges 15 bps in fees per year.
ALPS Barron's 400 ETF (BFOR - Free Report)
With AUM of $133.4 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 400 stocks in its basket, with none making up for more than 0.55% of assets. It charges 65 bps in annual fees and trades in a volume of 3,000 shares per day on average.
FlexShares Quality Dividend Index Fund (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 130 stocks in its basket, with none making up for more than 8.8% of assets (read: IMF Cuts Global Growth Forecast: ETF Strategies to Win).
FlexShares Quality Dividend Index Fund has amassed $1.6 billion in its asset base while it trades in an average daily volume of 61,000 shares. It charges 37 bps in fees per year from investors.
SPDR MSCI USA StrategicFactors ETF (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 628 stocks in its basket, with each accounting for less than 3.3% share.
SPDR MSCI USA StrategicFactors ETF has attracted $892.6 million in its asset base while trading an average daily volume of 33,000 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.