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Time for High-Quality ETFs as Slowdown Worries Mount?
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Wall Street is under pressure due to the global economic downturn, mirroring higher interest rates and the situation in China's domestic markets. Rates are likely to remain higher for longer in the United States due to sticky inflation. Meanwhile, China's manufacturing sector shows signs of weakness, real estate sector is reeling under acute pressure, and concerns about corporate earnings and commodity demand arise.
Currently, there is an 80.5% likelihood that the Federal Reserve will maintain its benchmark interest rate within the 5.25% to 5.50% range during the upcoming September meeting, according to the CME FedWatch Tool. September rate hike or not, one thing is evident from the latest Fed minutes that interest rates are likely stay elevated for a longer period time. No rate cuts are expected in the near term.
The potential for more hikes or higher rates put pressure on stocks. The full effects of the Fed's policy tightening since the start of 2022 are yet to be felt. The benchmark U.S. treasury yields started the week at 4.34%, dropped to 4.19% on Aug 23 only to shoot higher to 4.23% on Aug 24. The one-year U.S. treasury yield jumped to 5.39% on Aug 24, up from 5.35% recorded on Aug 23. No wonder, the broader market took a dive.
Why Quality Investing?
In the midst of these conflicting market signals, quality investing presents itself as a strategic approach to weathering market turbulence. Quality investing focuses on identifying companies with strong fundamentals, stable earnings, and durable competitive advantages. By investing in high-quality companies, investors can potentially mitigate the risks associated with economic downturns and market fluctuations.
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 1.30% 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 2.65% annually.
The underlying S&P 500 Dividend Aristocrats Index targets companies that are currently members of the S&P 500, have increased dividend payments each year for at least 25 years & meet certain market capitalization & liquidity requirements. The fund charges 35 bps in fees and yields 1.95% annually.
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 1.62% annually.
The underlying Morningstar Wide Moat Focus Index tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages. The fund charges 46 bps in fees and yields 1.04% annually.
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Time for High-Quality ETFs as Slowdown Worries Mount?
Wall Street is under pressure due to the global economic downturn, mirroring higher interest rates and the situation in China's domestic markets. Rates are likely to remain higher for longer in the United States due to sticky inflation. Meanwhile, China's manufacturing sector shows signs of weakness, real estate sector is reeling under acute pressure, and concerns about corporate earnings and commodity demand arise.
Currently, there is an 80.5% likelihood that the Federal Reserve will maintain its benchmark interest rate within the 5.25% to 5.50% range during the upcoming September meeting, according to the CME FedWatch Tool. September rate hike or not, one thing is evident from the latest Fed minutes that interest rates are likely stay elevated for a longer period time. No rate cuts are expected in the near term.
The potential for more hikes or higher rates put pressure on stocks. The full effects of the Fed's policy tightening since the start of 2022 are yet to be felt. The benchmark U.S. treasury yields started the week at 4.34%, dropped to 4.19% on Aug 23 only to shoot higher to 4.23% on Aug 24. The one-year U.S. treasury yield jumped to 5.39% on Aug 24, up from 5.35% recorded on Aug 23. No wonder, the broader market took a dive.
Why Quality Investing?
In the midst of these conflicting market signals, quality investing presents itself as a strategic approach to weathering market turbulence. Quality investing focuses on identifying companies with strong fundamentals, stable earnings, and durable competitive advantages. By investing in high-quality companies, investors can potentially mitigate the risks associated with economic downturns and market fluctuations.
ETFs in Focus
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 1.30% 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 2.65% annually.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL - Free Report)
The underlying S&P 500 Dividend Aristocrats Index targets companies that are currently members of the S&P 500, have increased dividend payments each year for at least 25 years & meet certain market capitalization & liquidity requirements. The fund charges 35 bps in fees and yields 1.95% annually.
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 1.62% annually.
VanEck Morningstar Wide Moat ETF (MOAT - Free Report)
The underlying Morningstar Wide Moat Focus Index tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages. The fund charges 46 bps in fees and yields 1.04% annually.