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Here's Why Quality ETFs Make a Good Bet Now

Sweta Jaiswal, FRM

The coronavirus pandemic continues to spread in the United States as the economy is reopening in phases. The United States alone has recorded more than 2.4 million cases and a death toll of more than 124,000. Per a Bloomberg report, 180,000 Americans are expected to die due to coronavirus by October. Considering the surging number of coronavirus cases, some states have started to pause the reopening process in the United States. Notably, Texas Governor Greg Abbott has announced holding back of reopening plans.

Raising investors’ concerns, the International Monetary Fund (IMF) has downgraded its outlook for the global economy and now expects a deeper global recession. It has said that the pandemic is causing wider and deeper damage to economic activity than initially predicted, leading government deficits to soar. It is predicting output to shrink 4.9% in 2020, much deeper than the 3% contraction estimated in April (according to a Reuters report).

Commenting further on the current scenario, IMF alerted that massive job cuts and business shutdowns would slow down recovery for the global economy. It now projects global growth in 2021 at 5.4%, which is far below its pre-pandemic predictions (per a Reuters' report). Furthermore, IMF now forecasts the U.S. economy to shrink 8% this year before expanding 4.5% in 2021.

Also, on the trade front, things can be worrisome as the United States is considering new tariffs on $3.1 billion of exports from France, Germany, Spain and the U.K., per a Bloomberg report. Notably, according to the World Trade Organisation (WTO), the pandemic resulted in an 18.5% decline in global trade in the second quarter of 2020, per a CNN report.

Is There a Silver Lining?

Although a resurgence is being observed in coronavirus cases, a slew of encouraging economic data indicates that the worst economic scenario might have been over in April. Along with upbeat data, introduction of more stimulus from the central bank and the announcement of Trump administration’s $1-trillion infrastructure spending bill is instilling optimism among investors.

The latest update on U.S. manufacturing output has pleased investors. Per the Federal Reserve’s recently-released data, the industrial production, including output at factories, mines and utilities, rose 1.4% month over month, reflecting the highest monthly gain since the beginning of 2020.

Retail sales in the United States also surged 17.7% sequentially in May, breezing past the forecast of an 8% jump. This marked the highest uptick on record in retail sales as the coronavirus-led lockdown eased. May’s retail sales figure topped the record 6.7% jump in October 2001, a month after the 9/11 terrorist attack, and easily surpassed analysts’ expectations of an 8.5% increase.

The latest preliminary report on June’s U.S. consumer sentiment shows that the metric has hit the highest level since 2016, largely due to falling unemployment levels and reopening of economic activities. 

Brave the Pandemic With Quality ETFs

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. They also have a track record of stable or rising sales and earnings growth. In comparison to plain vanilla funds, these products help in lowering volatility and perform rather well during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better 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: Did Markets Soar Ahead of Fundamentals? Quality ETFs to Play).

Expense Ratio: 0.15%

AUM: $18.02 billion

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: $1.95 billion

FlexShares Quality Dividend Index Fund QDF

This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Dividend Index.

Expense Ratio: 0.37%

AUM: $1.30 billion

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: $767.4 million

Barron's 400 ETF BFOR

This ETF seeks investment results that correspond generally, before fees and expenses, to the performance of the Barron's 400 Index.

Expense Ratio: 0.66%

AUM: $104.3 million

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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
 
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