Bet on Quality ETFs for a Volatile Market

Even though Wall Street is showing strength after a stupendous rally last quarter, surging new coronavirus cases has raised questions over continued recovery in economic activities, thereby making investors jittery (read: 5 ETF Areas Hitting Highs on Resurging Coronavirus Cases).

Additionally, the International Monetary Fund lowered its global growth forecast for this year, citing that the pandemic has caused an unprecedented decline in global activity. It now expects the economy to shrink 4.9%, down from 3% contraction predicted in April. If the forecast comes true, it will represent the worst downturn since the Great Depression of the 1930s, far worse than the financial crisis of 2008-2010.

Further, tensions between the United States and China have been flaring up as the country is weighing a sweeping travel ban on Chinese Communist Party officials, according to the New York Times. China recently imposed travel restrictions on U.S. lawmakers, including Senators Ted Cruz and Marco Rubio.

Apart from these, weak second-quarter earnings expectation has undermined investors’ confidence. Total S&P 500 earnings are expected to be down 44.9% from the same period last year on 10.5% lower revenues. This would be the biggest quarterly profit decline since the financial crisis. All of the 16 Zacks sectors are expected to experience earnings declines and four sectors will likely lose money (declines in excess of -100%) (read: Q2 Earnings Likely To Plunge: Invest in These Sector ETFs).

However, the Federal Reserve’s Beige Book survey showed that U.S. saw an uptick in business activity in the beginning of July as states eased restrictions to contain the novel coronavirus pandemic. The slew of fiscal and monetary stimulus is expected to provide upside to the stock market.

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

iShares Edge MSCI USA Quality Factor ETF QUAL

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: 5 ETF Ideas for a Winning Portfolio in the Second Half).

Expense Ratio: 0.15%
AUM: $18.5 billion
Average Daily Volume: 2 million shares

Invesco S&P 500 Quality ETF SPHQ

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: $2 billion
Average Daily Volume: 972,000 shares

Barron's 400 ETF BFOR

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: $106.8 million
Average Daily Volume: 13,000 shares

FlexShares Quality Dividend Index Fund QDF

This ETF follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends while maintaining a beta near 1.

Expense Ratio: 0.37%
AUM: $1.3 billion
Average Daily Volume: 159,000 shares

SPDR MSCI USA StrategicFactors ETF QUS

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: $778.7 million
Average Daily Volume: 104,000 shares

Bottom Line

Quality ETFs often provide hedge against market volatility. Adding any of the above-mentioned products to one’s long-term portfolio could be a good move 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 >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Invesco SP 500 Quality ETF (SPHQ): ETF Research Reports
SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports
BARRONS400 ETF (BFOR): ETF Research Reports
iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
FlexShares Quality Dividend ETF (QDF): ETF Research Reports
To read this article on click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.