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4 Quality ETFs & Stocks for Market-Beating Returns
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After surging to peak levels on Nov 7, the Wall Street is again entangled in a web of woes ranging from uncertainty in tax reform to a slide in oil prices (read: Looking to Buy The Dips? Here Are ETF & Stock Picks).
This is especially true given that the tax plan unveiled by the Senate differs from that of House Republicans on various fronts that have raised concerns over the delay in the implementation of corporate tax cuts, which happened to be the major driver of the recent stock market rally. Meanwhile, oil price retreated from its two-year high reached on Nov 6 on a weak demand outlook and an increase in crude inventories. Further, the flattening of the yield curve has made investors jittery, as this signals economic slowdown.
While the combination of these factors cannot be ignored, strong corporate earnings and improving health of economies around the world have been the strongest catalysts for the stock market rally this year. The dual tailwinds will continue to keep the positive momentum alive albeit at a slower pace.
According to the Organization for Economic Cooperation and Development, all 45 countries are on track to grow this year and expected to continue the momentum in 2018. Per International Monetary Fund (IMF), global growth is expected to be 3.6% this year and 3.7% in the next versus 3.2% last year. This would mark the fastest growth since 2010.
The S&P 500 companies recorded two consecutive quarters of double-digit earnings growth for the first time since 2011 and are on pace for 6.3% growth in the third quarter. Additionally, total Q3 earnings are on track to reach a new all-time quarterly record, surpassing the previous record reached in the preceding quarters (read: Q3 Earnings Effect: 5 Hottest ETF Charts).
Apart from these, rounds of upbeat economic data and low interest rate policies from central banks around the world are adding to the strength. All these suggest that the second-largest bull market still has legs.
Given bullish fundamentals and bouts of uncertainty, investors should focus on high-quality investing in a basket form.
Why Quality Investing?
Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These stocks 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 four solid picks from the ETF and stock worlds, targeting this niche strategy. Any of these could enjoy smooth trading and generate market-beating returns in a current rocky market.
This fund provides exposure to the 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.
Expense Ratio: 0.15% AUM: $3.9 billion Average Daily Volume: 259,000 shares Top Sector: Information Technology YTD Returns: 16.6%
This fund 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.
Expense Ratio: 0.29% AUM: $1.3 billion Average Daily Volume: 158,000 shares Top Sector: Industrials YTD Returns: 12.8%
This ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark uses the MarketGrader's fundamental analysis to select America’s highest-performing stocks based on growth, valuation, profitability and cash flow (read: Best ETF Strategies for a Hawkish Fed).
Expense Ratio: 0.65% AUM: $197 million Average Daily Volume: 11,000 shares Top Sector: Information Technology YTD Returns: 13.2%
FlexShares Quality Dividend Index Fund (QDF - Free Report)
This ETF follows the Northern Trust Quality Dividend Index and uses a proprietary model that includes factors like profitability, management efficiency and cash flow.
Expense Ratio: 0.37% AUM: $1.8 billion Average Daily Volume: 65,000 shares Top Sector: Information Technology YTD Returns: 10%
Stock Picks
To find out the best stocks in this space, we have used the Zacks Stock Screener. The parameters include a Zacks Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, double-digit current-year EPS growth, positive current-year earnings estimate revisions over the past 30 days, and dividend yield of greater than 1%.
This Pennsylvania-based company is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors, and capacitors). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Stock Rank: #1 VGM Style Score: A ROE: 11.77% Debt/Equity: 0.38 5 Year Historical EPS Growth: 7.02% Fiscal Year Earnings Growth: 64.71% Positive Earnings Estimate Revisions Over 30 Days: 2.19% Dividend Yield: 1.18% YTD Returns: 31.2%
This Texas-based company is a global producer and marketer of value-added titanium dioxide pigments.
Zacks Stock Rank: #1 VGM Style Score: B ROE: 31.38% Debt/Equity: 0.66 5 Year Historical EPS Growth: 1.54% Fiscal Year Earnings Growth: 419.35% Positive Earnings Estimate Revisions Over 30 Days: 6.62% Dividend Yield: 2.25% YTD Returns: 123.5%
In Conclusion
Quality ETFs and stocks often provide hedge against market volatility. Adding any of the above-mentioned products to one’s long-term portfolio could be worthwhile given their credit worthiness and soundness.
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4 Quality ETFs & Stocks for Market-Beating Returns
After surging to peak levels on Nov 7, the Wall Street is again entangled in a web of woes ranging from uncertainty in tax reform to a slide in oil prices (read: Looking to Buy The Dips? Here Are ETF & Stock Picks).
This is especially true given that the tax plan unveiled by the Senate differs from that of House Republicans on various fronts that have raised concerns over the delay in the implementation of corporate tax cuts, which happened to be the major driver of the recent stock market rally. Meanwhile, oil price retreated from its two-year high reached on Nov 6 on a weak demand outlook and an increase in crude inventories. Further, the flattening of the yield curve has made investors jittery, as this signals economic slowdown.
While the combination of these factors cannot be ignored, strong corporate earnings and improving health of economies around the world have been the strongest catalysts for the stock market rally this year. The dual tailwinds will continue to keep the positive momentum alive albeit at a slower pace.
According to the Organization for Economic Cooperation and Development, all 45 countries are on track to grow this year and expected to continue the momentum in 2018. Per International Monetary Fund (IMF), global growth is expected to be 3.6% this year and 3.7% in the next versus 3.2% last year. This would mark the fastest growth since 2010.
The S&P 500 companies recorded two consecutive quarters of double-digit earnings growth for the first time since 2011 and are on pace for 6.3% growth in the third quarter. Additionally, total Q3 earnings are on track to reach a new all-time quarterly record, surpassing the previous record reached in the preceding quarters (read: Q3 Earnings Effect: 5 Hottest ETF Charts).
Apart from these, rounds of upbeat economic data and low interest rate policies from central banks around the world are adding to the strength. All these suggest that the second-largest bull market still has legs.
Given bullish fundamentals and bouts of uncertainty, investors should focus on high-quality investing in a basket form.
Why Quality Investing?
Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These stocks 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 four solid picks from the ETF and stock worlds, targeting this niche strategy. Any of these could enjoy smooth trading and generate market-beating returns in a current rocky market.
ETFs to Buy
iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)
This fund provides exposure to the 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.
Expense Ratio: 0.15%
AUM: $3.9 billion
Average Daily Volume: 259,000 shares
Top Sector: Information Technology
YTD Returns: 16.6%
PowerShares S&P 500 Quality Portfolio (SPHQ - Free Report)
This fund 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.
Expense Ratio: 0.29%
AUM: $1.3 billion
Average Daily Volume: 158,000 shares
Top Sector: Industrials
YTD Returns: 12.8%
Barron's 400 ETF (BFOR - Free Report)
This ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark uses the MarketGrader's fundamental analysis to select America’s highest-performing stocks based on growth, valuation, profitability and cash flow (read: Best ETF Strategies for a Hawkish Fed).
Expense Ratio: 0.65%
AUM: $197 million
Average Daily Volume: 11,000 shares
Top Sector: Information Technology
YTD Returns: 13.2%
FlexShares Quality Dividend Index Fund (QDF - Free Report)
This ETF follows the Northern Trust Quality Dividend Index and uses a proprietary model that includes factors like profitability, management efficiency and cash flow.
Expense Ratio: 0.37%
AUM: $1.8 billion
Average Daily Volume: 65,000 shares
Top Sector: Information Technology
YTD Returns: 10%
Stock Picks
To find out the best stocks in this space, we have used the Zacks Stock Screener. The parameters include a Zacks Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, double-digit current-year EPS growth, positive current-year earnings estimate revisions over the past 30 days, and dividend yield of greater than 1%.
Cummins Inc. (CMI - Free Report)
This Indiana-based company is one of the leading worldwide designers and manufacturers of diesel engines.
Zacks Stock Rank: #2
VGM Style Score: B
ROE: 21.28%
Debt/Equity: 0.19
5 Year Historical EPS Growth: 4.07%
Fiscal Year Earnings Growth: 23.24%
Positive Earnings Estimate Revisions Over 30 Days: 3.07%
Dividend Yield: 2.55%
YTD Returns: 23.7%
Vishay Intertechnology, Inc. (VSH - Free Report)
This Pennsylvania-based company is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors, and capacitors). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Stock Rank: #1
VGM Style Score: A
ROE: 11.77%
Debt/Equity: 0.38
5 Year Historical EPS Growth: 7.02%
Fiscal Year Earnings Growth: 64.71%
Positive Earnings Estimate Revisions Over 30 Days: 2.19%
Dividend Yield: 1.18%
YTD Returns: 31.2%
Intel Corporation (INTC - Free Report)
This-California based company is one of the world's largest semiconductor chip makers (read: 7 Top-Ranked Tech ETFs on Unstoppable Rally).
Zacks Stock Rank: #1
VGM Style Score: B
ROE: 22.65%
Debt/Equity: 0.39
5 Year Historical EPS Growth: 10.70%
Fiscal Year Earnings Growth: 17.85%
Positive Earnings Estimate Revisions Over 30 Days: 6.57%
Dividend Yield: 2.38%
YTD Returns: 26.4%
Kronos Worldwide Inc. (KRO - Free Report)
This Texas-based company is a global producer and marketer of value-added titanium dioxide pigments.
Zacks Stock Rank: #1
VGM Style Score: B
ROE: 31.38%
Debt/Equity: 0.66
5 Year Historical EPS Growth: 1.54%
Fiscal Year Earnings Growth: 419.35%
Positive Earnings Estimate Revisions Over 30 Days: 6.62%
Dividend Yield: 2.25%
YTD Returns: 123.5%
In Conclusion
Quality ETFs and stocks often provide hedge against market volatility. Adding any of the above-mentioned products to one’s long-term portfolio could be worthwhile given their credit worthiness and soundness.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>