Yahoo Finance Invest in These Quality ETFs Amid Rate Cut Uncertainty
All three major indices are at their record highs, buoyed by solid corporate earnings, Fed rate cut bets and booming AI. The rally is expected to continue but the uncertainty about the timing of Fed rate cuts might weigh on investors sentiment.
In such a scenario, investors should focus on high-quality investing. Quality stocks possess a sustainable competitive advantage and demonstrate consistent growth, profitability and operational excellence over time. While there are several funds available in the space, we have chosen the five most popular ETFs targeting the niche strategy. These are iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ, JPMorgan U.S. Quality Factor ETF JQUA, FlexShares Quality Dividend Index Fund QDF and SPDR MSCI USA StrategicFactors ETF QUS.
Quality ETFs often provide a hedge against market volatility and uncertainty.
Bull Vs. Bear
Wall Street is getting more bullish on stocks, given the improving outlook for both earnings and economic growth. Over the past two weeks, three equity strategists tracked by Yahoo Finance have boosted their year-end targets for the S&P 500. The median target on Wall Street for the benchmark index now sits at 5,250, up from the median target of 4,850 on Dec 30, per Bloomberg data.
BMO Capital Markets boosted the year-end price target for the S&P 500 to 5,600 from 5,100, becoming the most bullish analyst on Wall Street. Deutsche Bank raised the price target to 5,500 for this year from 5,100, citing strong corporate earnings to support equity valuations. In fact, it has the highest target among the major brokerages (read: ETFs to Bet on Analysts' Bullish Forecast for S&P 500).
One of Wall Street’s most prominent bears, Morgan Stanley, also turned positive on the outlook for U.S. stocks by lifting the price target for the S&P 500 to 5,400 from 4,500. It now expects the index to rise 2% this year, a major turn in its view that the benchmark will tumble 15% by December.
Earnings grew 6% in the first quarter of 2024, the highest rate of growth seen in nearly two years. Hopes for rate cuts, continued AI adoption as well as strong earnings growth projections are expected to drive the stocks higher.
However, the latest Fed minutes highlight concerns over stubborn inflation. While inflation has eased over the past year, it failed to show further progress toward the Fed’s 2% objective in recent months. As such, the disinflation process would likely take longer than previously thought, per Fed minutes. Markets are now pricing in a 49.4% chance for a rate cut at the Fed's September meeting, down from 54.8% a week ago, according to the CME's FedWatch Tool. Additionally, geopolitics will continue to be an overhang.
Why Quality?
We have highlighted solid reasons for investing in quality stocks.
Lower Volatility: Quality stocks tend to exhibit lower volatility compared to the broader market. Their robust business models and financial strength make them less susceptible to market fluctuations, leading to a smoother investment journey.
Defensive Nature: During economic downturns, quality stocks often prove more resilient as they have strong balance sheets and low levels of debt and cash reserves to help them tide over challenging times.
Value Preservation: In uncertain or declining market environments, quality stocks can serve as a relative safe haven, preserving capital better than more speculative or lower-quality investments.
Strong Brand and Moat: Quality companies often possess strong brands and competitive moats, which protect them from competition. This can lead to a sustainable competitive advantage, ensuring long-term profitability.
Long-Term Outperformance: Historically, high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. This is because quality companies have strong fundamentals that can weather economic downturns better than their weaker counterparts.
Consistent Profitability: Quality companies tend to have a high return on equity (ROE), return on invested capital (ROIC) and profit margins. These are indicators of a company's ability to generate profit consistently.
Compounding Effect: Investing in quality companies allows investors to benefit from the power of compounding. As these companies consistently grow their earnings and reinvest them, shareholders can achieve exponential returns over time.
Transparency and Governance: High-quality companies usually have transparent financial reporting and sound corporate governance. This reduces the chances of any unwelcome surprises and can potentially reduce investment risk.
Growth Potential: Even if they are established leaders, many quality companies still have significant room for growth, especially if they operate in expanding industries or have opportunities to penetrate new markets.
Dividend Payouts: Quality companies often have a history of paying consistent dividends, providing a source of income for investors. Moreover, since they are usually in a strong financial position, there's a good chance for steady or even increasing dividend payouts in the future (read: Rate Cut or No Rate Cut, Dividend ETFs You Should Buy).
ETFs to Invest
iShares MSCI USA Quality Factor ETF (QUAL)
With an AUM of $44.2 billion, iShares MSCI USA Quality Factor ETF 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. QUAL holds 126 stocks in its basket and charges 15 bps in annual fees. It trades in an average daily volume of 1.1 million shares.
Invesco S&P 500 Quality ETF (SPHQ)
Invesco S&P 500 Quality ETF tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks with the highest-quality score based on three fundamental measures such as return on equity, accruals ratio and financial leverage ratio. Holding 101 stocks in its basket, Invesco S&P 500 Quality ETF has amassed $9 billion in its asset base and trades at an average daily volume of 873,000 shares. It charges 15 bps in fees per year.
JPMorgan U.S. Quality Factor ETF (JQUA)
JPMorgan U.S. Quality Factor ETF provides domestic equity exposure with a focus on companies with strong quality and profitability characteristics and the potential to enhance returns. It tracks the JP Morgan US Quality Factor Index and holds 259 stocks in its basket. JPMorgan U.S. Quality Factor ETF has amassed $4.2 billion in its asset base and charges 12 bps in fees per year. It trades in an average daily volume of 512,000 shares.
FlexShares Quality Dividend Index Fund (QDF)
FlexShares Quality Dividend Index Fund is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index. QDF is home to 134 stocks in its basket and charges 37 bps in fees per year. FlexShares Quality Dividend Index Fund has accumulated $1.7 billion in its asset base and trades in an average daily volume of 34,000 shares.
SPDR MSCI USA StrategicFactors ETF (QUS)
SPDR MSCI USA StrategicFactors ETF offers exposure to stocks that combine low volatility, quality and value factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Capped Index. SPDR MSCI USA StrategicFactors ETF holds 608 stocks in its basket and charges 15 bps in fees per year from investors. It has attracted $1.3 billion in its asset base and trades in an average daily volume of 30,000 shares.
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
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
FlexShares Quality Dividend ETF (QDF): ETF Research Reports
Invesco S&P 500 Quality ETF (SPHQ): ETF Research Reports
SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports
JPMorgan U.S. Quality Factor ETF (JQUA): ETF Research Reports
