ETFs

Invest in these quality ETFs amid uncertainty linked to falling rates

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All three major indexes are at record highs, supported by strong corporate earnings, Fed rate cut bets and the rise of AI. The recovery is expected to continue, but uncertainty over the timing of Fed rate cuts could weigh on investor confidence.

In such a scenario, investors should focus on high-quality investments. Quality stocks possess a sustainable competitive advantage and demonstrate consistent growth, profitability and operational excellence over time. Although there are several funds available in the field, we have chosen the five most popular ETFs targeting the niche strategy. These are iShares MSCI USA Quality Factor ETF QUALITY, Invesco S&P 500 Quality ETF SPHQ, JPMorgan US Quality Factor ETF JQUA, FlexShares Quality Dividend Index Fund QDF and SPDR MSCI USA ETF StrategicFactors QUS.

Quality ETFs often provide protection against market volatility and uncertainty.

Taurus Vs. Bear

Wall Street is becoming more bullish on stocks, given the improving outlook for earnings and economic growth. Over the past two weeks, three equity strategists tracked by Yahoo Finance have raised their year-end targets for the S&P 500. The median target on Wall Street for the benchmark index now stands at 5,250, up from 4 850 on December 30. , according to Bloomberg data.

BMO Capital Markets raised the year-end price target for the S&P 500 from 5,100 to 5,600, becoming the most bullish analyst on Wall Street. Deutsche Bank raised its price target from 5,100 to 5,500 for this year, citing strong corporate earnings to support stock valuations. In fact, its target is the highest among major brokerages (read: ETFs Should Bet on Analysts’ Bullish Forecasts for the S&P 500).

One of Wall Street’s leading bears, Morgan Stanley, also turned positive on the outlook for U.S. stocks by raising the price target for the S&P 500 from 4,500 to 5,400. It now expects the index is rising 2% this year, a major turnaround from its forecast of a 15% drop in the benchmark by December.

Profits rose 6% in the first quarter of 2024, the highest growth rate seen in almost two years. Hopes for rate cuts, continued adoption of AI as well as strong earnings growth projections should send stocks higher.

However, the Fed’s latest minutes highlight concerns about stubborn inflation. Although inflation has eased over the past year, it has failed to move toward the Fed’s 2% target in recent months. As such, the disinflation process would likely take longer than expected, according to the Fed minutes. Markets now price the probability of a rate cut at the September Fed meeting at 49.4%, up from 54.8% a week ago, according to the CME’s FedWatch tool. Additionally, geopolitics will remain an issue.

The story continues

Why quality?

We’ve highlighted strong reasons to invest in quality stocks.

Lower volatility: Quality stocks tend to have lower volatility than the market as a whole. Their robust business models and financial strength make them less susceptible to market fluctuations, making their investment journey easier.

Defensive nature: During economic downturns, quality stocks often prove more resilient because they have strong balance sheets and low levels of debt and cash reserves to help them weather tough times.

Preservation of value: 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 mark and gap: Quality companies often have strong brands and competitive moats that protect them from competition. This can lead to a sustainable competitive advantage, ensuring long-term profitability.

Long-term outperformance: Historically, high-quality companies consistently generate higher risk-adjusted returns than the broader market over the long term. This is because quality companies have strong fundamentals that can withstand economic downturns better than their weaker counterparts.

Constant profitability: Quality businesses tend to have high return on equity (ROE), return on invested capital (ROIC), and profit margins. These are indicators of a company’s ability to consistently generate profits.

Cumulative effect: Investing in quality companies allows investors to benefit from the power of capitalization. As these companies continually grow their profits and reinvest them, shareholders can earn exponential returns over time.

Transparency and governance: High-quality companies generally have transparent financial information and good corporate governance. This reduces the risk of unpleasant 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 growing industries or have opportunities to enter new markets.

Dividend payments: Quality companies often have a history of paying consistent dividends, providing a source of income for investors. Additionally, since they are generally in a strong financial position, there is a good chance of seeing stable or even increasing dividend payouts in the future (read: Rate Cut or No Rate Cut, Dividend ETFs That you should buy).

ETF for investing

iShares MSCI USA Quality Factor ETF (QUAL)

With $44.2 billion in assets under management, the iShares MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks with positive fundamentals (high return on equity, stable year-over-year earnings growth on the other and low financial leverage) following the MSCI USA sector. Neutral quality index. QUAL holds 126 stocks in its basket and charges 15 basis points in annual fees. It trades an average daily volume of 1.1 million shares.

Invesco S&P 500 Quality ETF (SPHQ)

The 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 metrics such as return on equity, accrual ratio and financial leverage ratio. Holding 101 stocks in its basket, the 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 basis points in fees per year.

JPMorgan US Quality Factor ETF (JQUA)

The JPMorgan US Quality Factor ETF provides exposure to domestic equities with an emphasis on companies with strong quality and profitability characteristics and the potential for improved returns. It tracks the JP Morgan US Quality Factor Index and holds 259 stocks in its basket. JPMorgan US Quality Factor ETF has amassed $4.2 billion in its asset base and charges 12 basis points in fees annually. It trades an average daily volume of 512,000 shares.

FlexShares Quality Dividend Index Fund (QDF)

The FlexShares Quality Dividend Index Fund is designed to provide exposure to a portfolio of high-quality, long-term income-oriented U.S. equity securities with an emphasis on long-term capital growth and targeted overall beta. similar to that of the Northern Trust. Index 1250. QDF houses 134 stocks in its basket and charges 37 basis points in fees per year. The FlexShares Quality Dividend Index Fund has accumulated $1.7 billion in its asset base and trades an average daily volume of 34,000 shares.

SPDR MSCI USA StrategicFactors ETF (QUS)

The SPDR MSCI USA StrategicFactors ETF provides 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. The MSCI USA StrategicFactors SPDR ETF holds 608 stocks in its basket and charges investors 15 basis points in fees per year. It has attracted $1.3 billion into its asset base and trades an average daily volume of 30,000 shares.

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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 US Quality Factor ETF (JQUA): ETF Research Reports

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