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Quality ETFs to Shine as More Fed Hikes Loom Despite June Pause?
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As expected, the Federal Reserve decided to leave interest rates unchanged, on Wednesday. The decision follows ten prior increases and ongoing reduction in the Fed's security holdings. The committee's dot plot revealed expectations of a funds rate of 5.6% by the end of 2023, implying two more quarter-point rate hikes are likely before the year's end.
Market Reaction and Future Speculations
The potential for more hikes put pressure on stocks, but optimism about the fight against inflation allowed a brief rebound. Fed chief Powell's assurance that the full effects of the Fed's policy tightening are yet to be felt offered some encouragement to investors. Despite this pause, market experts suggested that a shift in approach might be on the horizon. The nature of the next move, however, remains uncertain, with the July FOMC meeting offering more clarity.
Economic Forecasts
Forecasts for future years also increased, with expectations of the fed funds rate of 4.6% in 2024 and 3.4% in 2025. The Fed boosted its 2023 economic growth expectations to 1% GDP gain, up from the 0.4% estimate in March. Optimism about unemployment also increased, with a projected year-end rate of 4.1% as opposed to March's 4.5% prediction. Inflation projections rose to 3.9% for core and decreased slightly to 3.2% for the headline.
Why Invest in Quality ETFs?
While the June pause, and upcoming moderate rate hikes—when compared with the magnitude of previous hikes—will likely boost risk-on sentiments, one thing is clear: interest rates are expected to remain at an elevated level this year.
While value stocks and ETFs fare better in a higher-rate environment, several growth sectors offer attractive valuations right now. However, complicating the situation are factors such as a regional banking crisis, a real estate sector that has yet to recover, and sticky inflation.
So, the investing scenario is a bit tricky at the moment. Given these circumstances, why not consider quality products? Quality companies are often resilient to economic cycles due to their strong fundamentals. Their resilience makes them a safe haven during periods of uncertainty and higher interest rates.
It is an investment strategy that focuses on companies with strong fundamentals such as low debt, strong balance sheets, consistent earnings growth, robust cash flows, strong management teams, competitive advantages and better capital allocation.
The underlying Northern Trust Quality Dividend Index is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index and the Index are selected based on expected dividend payment and fundamental factors. The fund yields 2.18% annually and charges 37 bps in fees.
The underlying S&P 500 Quality Index tracks the performance of stocks in the S&P 500 Index that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio. The fund charges 15 bps in fees and yields 1.70% annually.
The underlying MSCI USA Sector Neutral Quality Index is based on a traditional market capitalization-weighted parent index, the MSCI USA Index which includes U.S. large and mid-capitalization stocks. The fund charges 15 bps in fees and yields 1.34% annually.
The underlying S&P High Yield Dividend Aristocrats Index measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. The fund charges 35 bps in fees and yields 2.56% annually.
The underlying S&P Technology Dividend Aristocrats Index targets companies from information technology, internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy. The fund charges 45 bps in fees.
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Quality ETFs to Shine as More Fed Hikes Loom Despite June Pause?
As expected, the Federal Reserve decided to leave interest rates unchanged, on Wednesday. The decision follows ten prior increases and ongoing reduction in the Fed's security holdings. The committee's dot plot revealed expectations of a funds rate of 5.6% by the end of 2023, implying two more quarter-point rate hikes are likely before the year's end.
Market Reaction and Future Speculations
The potential for more hikes put pressure on stocks, but optimism about the fight against inflation allowed a brief rebound. Fed chief Powell's assurance that the full effects of the Fed's policy tightening are yet to be felt offered some encouragement to investors. Despite this pause, market experts suggested that a shift in approach might be on the horizon. The nature of the next move, however, remains uncertain, with the July FOMC meeting offering more clarity.
Economic Forecasts
Forecasts for future years also increased, with expectations of the fed funds rate of 4.6% in 2024 and 3.4% in 2025. The Fed boosted its 2023 economic growth expectations to 1% GDP gain, up from the 0.4% estimate in March. Optimism about unemployment also increased, with a projected year-end rate of 4.1% as opposed to March's 4.5% prediction. Inflation projections rose to 3.9% for core and decreased slightly to 3.2% for the headline.
Why Invest in Quality ETFs?
While the June pause, and upcoming moderate rate hikes—when compared with the magnitude of previous hikes—will likely boost risk-on sentiments, one thing is clear: interest rates are expected to remain at an elevated level this year.
While value stocks and ETFs fare better in a higher-rate environment, several growth sectors offer attractive valuations right now. However, complicating the situation are factors such as a regional banking crisis, a real estate sector that has yet to recover, and sticky inflation.
So, the investing scenario is a bit tricky at the moment. Given these circumstances, why not consider quality products? Quality companies are often resilient to economic cycles due to their strong fundamentals. Their resilience makes them a safe haven during periods of uncertainty and higher interest rates.
It is an investment strategy that focuses on companies with strong fundamentals such as low debt, strong balance sheets, consistent earnings growth, robust cash flows, strong management teams, competitive advantages and better capital allocation.
ETFs in Focus
FlexShares Quality Dividend ETF (QDF - Free Report)
The underlying Northern Trust Quality Dividend Index is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index and the Index are selected based on expected dividend payment and fundamental factors. The fund yields 2.18% annually and charges 37 bps in fees.
Invesco S&P 500 Quality ETF (SPHQ - Free Report)
The underlying S&P 500 Quality Index tracks the performance of stocks in the S&P 500 Index that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio. The fund charges 15 bps in fees and yields 1.70% annually.
iShares MSCI USA Quality Factor ETF (QUAL - Free Report)
The underlying MSCI USA Sector Neutral Quality Index is based on a traditional market capitalization-weighted parent index, the MSCI USA Index which includes U.S. large and mid-capitalization stocks. The fund charges 15 bps in fees and yields 1.34% annually.
SPDR S&P Dividend ETF (SDY - Free Report)
The underlying S&P High Yield Dividend Aristocrats Index measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. The fund charges 35 bps in fees and yields 2.56% annually.
ProShares S&P Technology Dividend Aristocrats ETF (TDV - Free Report)
The underlying S&P Technology Dividend Aristocrats Index targets companies from information technology, internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy. The fund charges 45 bps in fees.