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Time for Quality ETFs on U.S. Ratings Turmoil & Fed's Dilemma?
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The U.S. market has been going through a rough patch. Fitch, the global ratings agency, recently issued a negative watch on the U.S.' AAA rating due to the ongoing debt ceiling standoff in the country. The credit agency anticipates a deal before the early-June deadline but highlights the growing risk of a potential U.S. default.
A failure to raise the debt ceiling could result in significant downgrades to various U.S. securities, signaling downside risks to U.S. creditworthiness. This scenario echoes the country's credit downgrade in 2011 due to similar reasons, which had caused substantial global market declines.
The Debt Ceiling Battle
The recent turmoil stems from the friction between Democrat and Republican lawmakers. The parties continue to debate over increasing the $31 trillion debt limit, reached in January, with divergent approaches to government spending and debt management. The impasse has reignited concerns about the United States' medium-term fiscal challenges, potentially affecting its credit rating.
Federal Reserve's Conundrum
Amid this tumult, the Federal Reserve faces its own set of challenges. Its recent meetings have revealed a split in opinion on the future direction of interest rates, balancing between the need for increases to counter inflation and a potential slowdown in economic growth. This division reflects the evolving market dynamics and uncertainties, pushing the Fed toward a more data-dependent approach.
Time for Quality ETF Investing?
Regardless of the fiscal and monetary policy outcome, the ongoing turmoil around the national debt ceiling, the regional banking crisis and the future of U.S. monetary policy remain pivotal for both domestic and global economic stability. Hence, quality ETF investing could be an intriguing idea.
Winning Attributes of High-Quality Investing
Dividend Payouts: Many quality stocks are dividend payers. Dividends can provide a steady income stream in addition to any capital gains, which can be particularly useful for income-focused investors.
Financial Stability: Quality stocks are generally characterized by solid balance sheets, strong cash flow, low debt levels and robust profitability. These attributes often make them less susceptible to economic downturns.
Resilience during Market Volatility: Quality stocks are often less volatile than growth stocks or smaller, more speculative companies. This can be especially beneficial during periods of increased market uncertainty or economic downturns.
Value Preservation: High-quality stocks have a history of preserving investors' capital while providing a decent return. They often have less dramatic price swings and can therefore protect against significant losses.
ETFs in Focus
Against this backdrop, below we highlight a few quality ETFs that could tapped now. Returns are as of May 24, 2023.
iShares MSCI USA Quality Factor ETF (QUAL - Free Report) – Up 10.3% This year versus 8.7% gains in S&P 500
American Century STOXX U.S. Quality Growth ETF (QGRO - Free Report) – Up 10.6% this year
SEI Enhanced U.S. Large Cap Quality Factor ETF (SEIQ - Free Report) – Up 9.8%
Image: Bigstock
Time for Quality ETFs on U.S. Ratings Turmoil & Fed's Dilemma?
The U.S. market has been going through a rough patch. Fitch, the global ratings agency, recently issued a negative watch on the U.S.' AAA rating due to the ongoing debt ceiling standoff in the country. The credit agency anticipates a deal before the early-June deadline but highlights the growing risk of a potential U.S. default.
A failure to raise the debt ceiling could result in significant downgrades to various U.S. securities, signaling downside risks to U.S. creditworthiness. This scenario echoes the country's credit downgrade in 2011 due to similar reasons, which had caused substantial global market declines.
The Debt Ceiling Battle
The recent turmoil stems from the friction between Democrat and Republican lawmakers. The parties continue to debate over increasing the $31 trillion debt limit, reached in January, with divergent approaches to government spending and debt management. The impasse has reignited concerns about the United States' medium-term fiscal challenges, potentially affecting its credit rating.
Federal Reserve's Conundrum
Amid this tumult, the Federal Reserve faces its own set of challenges. Its recent meetings have revealed a split in opinion on the future direction of interest rates, balancing between the need for increases to counter inflation and a potential slowdown in economic growth. This division reflects the evolving market dynamics and uncertainties, pushing the Fed toward a more data-dependent approach.
Time for Quality ETF Investing?
Regardless of the fiscal and monetary policy outcome, the ongoing turmoil around the national debt ceiling, the regional banking crisis and the future of U.S. monetary policy remain pivotal for both domestic and global economic stability. Hence, quality ETF investing could be an intriguing idea.
Winning Attributes of High-Quality Investing
Dividend Payouts: Many quality stocks are dividend payers. Dividends can provide a steady income stream in addition to any capital gains, which can be particularly useful for income-focused investors.
Financial Stability: Quality stocks are generally characterized by solid balance sheets, strong cash flow, low debt levels and robust profitability. These attributes often make them less susceptible to economic downturns.
Resilience during Market Volatility: Quality stocks are often less volatile than growth stocks or smaller, more speculative companies. This can be especially beneficial during periods of increased market uncertainty or economic downturns.
Value Preservation: High-quality stocks have a history of preserving investors' capital while providing a decent return. They often have less dramatic price swings and can therefore protect against significant losses.
ETFs in Focus
Against this backdrop, below we highlight a few quality ETFs that could tapped now. Returns are as of May 24, 2023.
iShares MSCI USA Quality Factor ETF (QUAL - Free Report) – Up 10.3% This year versus 8.7% gains in S&P 500
American Century STOXX U.S. Quality Growth ETF (QGRO - Free Report) – Up 10.6% this year
SEI Enhanced U.S. Large Cap Quality Factor ETF (SEIQ - Free Report) – Up 9.8%
iShares MSCI Intl Quality Factor ETF (IQLT - Free Report) – Up 9.5%