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Quality ETFs & Stocks to Beat the Market

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Trade has been playing foul in the stock market since President Donald Trump threatens to impose 10% tariff on $300 billion worth of Chinese goods effective Sep 1. China retaliated by allowing the yuan to slip to the lowest level against the dollar in more than a decade, sparking currency war concerns. Per Bloomberg News, China has also halted imports of U.S. agricultural products.

However, trade tensions eased somewhat this week when the Office of the U.S. Trade Representative said it would delay tariffs on certain Chinese products, mainly consumer goods that are made in China and sold in the United States, until Dec 15. A few products would be removed altogether, including certain types of fish and baby seats. The latest drama in the U.S.-Sino trade war has renewed the appeal for riskier assets but uncertainty lingers (read: A Spread of Top-Ranked Value ETFs for the Current Market).

Additionally, a slew of downbeat economic data across the globe also resulted in a stock market decline. The U.S. ISM manufacturing index dropped for the fourth straight month in July to record the lowest reading since August 2016. The U.S. non-manufacturing (services) index also dropped last month. United Kingdom’s economy shrank for the first time in more than six years in the second quarter and the producer-price index in China contracted for the first time in nearly three years. China’s industrial output growth falls to a more than 17-year low.

Further, the possibility of snap elections in Italy, rising concerns about the pro-democracy protests in Hong Kong, and a plunge in Argentina's currency and stock markets added to the chaos.

Against such a backdrop, investors should focus on high-quality investing.

Why 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 record 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 & stocks targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.

ETF Picks    

iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)


This fund 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 (read: 6 Defensive ETFs to Beat an Edgy Market in August).

Expense Ratio: 0.15%
AUM: $11 billion
Average Daily Volume: 1.2 million shares
Top Sector: Information Technology

Invesco S&P 500 Quality ETF (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: 0.15%
AUM: $1.4 billion
Average Daily Volume: 313,000 shares
Top Sector: Information Technology

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.

Expense Ratio: 0.66%
AUM: $141.9 million
Average Daily Volume: 8,000 shares
Top Sector: Industrials

FlexShares Quality Dividend Index Fund (QDF - Free Report)

This ETF follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends while maintaining a beta near 1 (read: Red Hot Dividend ETFs of 2019).

Expense Ratio: 0.37%
AUM: $1.6 billion
Average Daily Volume: 111,000 shares
Top Sector: Information Technology

SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)

This fund offers exposure to stocks that have a combination of value, low volatility and quality factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index.

Expense Ratio: 0.15%
AUM: $384.8 million
Average Daily Volume: 20,000 shares
Top Sector: Information Technology

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%.

Standard Motor Products Inc. (SMP - Free Report)

This is a leading independent manufacturer, distributor and marketer of replacement parts for motor vehicles in the automotive aftermarket industry.

Zacks Rank: #2
VGM Score: A
ROE: 13.71%
Debt/Equity: 0.06
5 Year Historical EPS Growth: 3.4%
Fiscal Year Earnings Growth: 20%
Positive Earnings Estimate Revisions Over 30 Days: 3.91%
Dividend Yield: 2.09%

Federated Investors Inc. (FII - Free Report)

This is a provider of investment management and related financial services. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zacks Rank: #1
VGM Score: B
ROE: 27.29%
Debt/Equity: 0.26
5 Year Historical EPS Growth: 13.22%
Fiscal Year Earnings Growth: 14.22%
Positive Earnings Estimate Revisions Over 30 Days: 2.72%
Dividend Yield: 3.29%

Federal Signal Corporation (FSS - Free Report)

This is a leader in environmental and safety solutions providing products and services to protect people and the planet (read: How to Hedge Your Portfolio With ETFs Amid Rising Volatility).

Zacks Rank: #1
VGM Score: B
ROE: 17.99%
Debt/Equity: 0.39
5 Year Historical EPS Growth: 7.08%
Fiscal Year Earnings Growth: 20.28%
Positive Earnings Estimate Revisions Over 30 Days: 9.11%
Dividend Yield: 1.04%

The Allstate Corporation (ALL - Free Report)

It provides property and casualty, and other insurance products in the United States and Canada.

Zacks Rank: #2
VGM Score: A
ROE: 12.66%
Debt/Equity: 0.29
5 Year Historical EPS Growth: 12.56%
Fiscal Year Earnings Growth: 15.86%
Positive Earnings Estimate Revisions Over 30 Days: 4.98%
Dividend Yield: 1.91%

D.R. Horton Inc. (DHI - Free Report)

This homebuilding company is engaged in the acquisition and development of land; and construction and sale of homes in 27 states and 81 markets in the United States under the names of D.R. Horton, America's Builder, Express Homes, Emerald Homes, Freedom Homes, and Pacific Ridge Homes (read: Housing ETFs to Buy on D.R. Horton Beat & Likely Fed Rate Cut).

Zacks Rank: #2
VGM Score: A
ROE: 16.71%
Debt/Equity: 0.35
5 Year Historical EPS Growth: 25.24%
Fiscal Year Earnings Growth: 1.96%
Positive Earnings Estimate Revisions Over 30 Days: 6.77%
Dividend Yield: 1.25%

Bottom Line

Quality ETFs and stocks often provide hedge against market volatility. Adding any of the abovementioned products to one’s long-term portfolio could be a good move given their credit worthiness and soundness.

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