Quality ETFs Look Attractive As Fed Rate Hike Approaches


Wall Street got off to a slow start in 2022, as major stock indexes felt pressure from rising benchmark 10-year Treasury yields. In addition, the release of the minutes of the Federal Reserve’s meeting in December indicated tightening of monetary regulations. The Dow Jones Industrial Average lost 0.4% on January 6. The other two major stock indexes, the S&P 500 and the Nasdaq Composite, also fell about 0.1% each. In fact, the Nasdaq Composite has lost around 4% over the past two trading days.

The reason for this slowdown in the tech market may essentially be the surge in benchmark 10-year Treasury yields, which reached over 1.75% on January 6. after reaching 1.51% on December 31. Growth sectors like the tech space have felt the pain of rising bond yields as it lowers the relative value of future earnings, making popular stocks appear overvalued. Tech companies are also facing hurdles in financing their growth and repurchasing stocks due to the higher rates (according to a CNBC article).

Investors keen to weather the current market turmoil due to the latest concerns with the COVID-19 variant may consider IShares MSCI USA Quality Factor ETF QUALITY, Invesco S&P 500 Quality ETF SPHQ, FlexShares Quality Dividend Index Fund QDF, ETF SPDR MSCI USA StrategicFactors QUS and Barron’s 400 ETF BFOR.

Final minutes driven by concerns over Fed cut its balance sheet of nearly $ 9 trillion in 2022 after the interest rate hike in March of this year. In fact, Infrastructure Capital Management CEO Jay Hatfield called the odds of the Fed’s balance sheet selling as “key risk for the year,” as mentioned in a CNBC article. He also commented in the same article that “If the Fed starts to reduce its balance sheet, it will be disastrous. I guess they’re going to keep the balance sheet flat, but it’s possible that if inflation stays very high, they’ll start letting the balance sheet drain. In addition, the Federal Reserve could take a more aggressive approach to raising interest rates.

The Federal Reserve has already started cutting its bond purchases, which it plans to complete by March of this year. The Fed is expected to start raising its key rate in March.

The ISM manufacturing PMI in the United States slipped to 58.7 in December 2021 from 61.1 in November, behind the market forecast of 60. The reading highlighted the weaker growth in the activity of factories since January due to weak growth in new orders (60.4 versus 61.5).

Quality ETFs worth the detour

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and healthy margins. These stocks also have a history of stable or rising sales and earnings growth. Compared to regular funds, these products help reduce volatility and work quite well when the market is uncertain. Additionally, academic research has proven that high quality companies consistently offer better risk-adjusted returns than the broader market over the long term.

Against this background, we have highlighted five ETFs targeting this niche strategy. These could benefit from smooth trading and generate above market returns in the current market scenario.

IShares MSCI USA Quality Factor ETF (QUALITY)

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 and low leverage) by tracking MSCI USA Sector Neutral Quality index (read: 5 bets on the defensive ETF as Omicron enters the United States).

Expense ratio: 0.15%

AUM: $ 25.38 billion

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 that has the highest quality score based on three fundamental measures, namely return on equity, accrual ratio and leverage ratio.

Expense ratio: 0.15%

Assets under management: $ 3.67 billion

FlexShares Quality Dividend Index Fund (QDF)

The FlexShares Quality Dividend Index Fund seeks investment results that generally correspond to the price and return, before fees and expenses, of the Northern Trust Quality Dividend Index.

Expense ratio: 0.37%

AUM: $ 1.73 billion

ETF SPDR MSCI USA StrategicFactors (QUS)

The SPDR MSCI USA StrategicFactors ETF provides exposure to equities that combine value, low volatility and quality factor strategies. This is done by following the MSCI USA Factor Mix A-Series Capped Index (read: ETFs and quality stocks for likely faster Fed tightening and Omicron).

Expense ratio: 0.15%

ASG: $ 1.05 billion

Barron’s 400 ETF (EPB)

The Barron’s 400 ETF seeks investment results that generally match, before fees and expenses, the performance of the Barron 400 Index.

Total operating expenses: 0.70%

ASG: $ 158 million

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IShares MSCI USA Quality Factor (QUAL) ETF: ETF Research Reports

ETF FlexShares Quality Dividend (QDF): ETF Research Reports

Invesco S&P 500 Quality ETFs (SPHQ): ETF Research Reports

ETF BARRONS400 (BFOR): ETF Research Reports

SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports

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


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