The global stock market has been on a wild ride over the past few weeks. The wave of intense selling was initially triggered by the surprise devaluation of the Chinese currency last month. The move not only derailed the stock market but also accelerated the slump in commodities and emerging market currencies, raising global growth worries.
The damage was aggravated by lower oil prices, sluggishness in other developed and developing markets, a strong dollar, and an uncertain Fed policy. In particular, the ambiguity over rising rates has taken the front seat this week as the Fed policy meeting is to be held on September 16–17. According to the poll by Reuters in August, the Fed is expected to pull its trigger on the first rates hike in almost a decade in this scheduled meeting though relentless slowdown in China and the recent global market turmoil is dimming the prospects (read: 4 ETF Areas to Watch Ahead of the Fed Meeting).
Whatever the case, the bullish sentiment for U.S. stocks remains intact. This is especially true as near-zero rates have allowed the U.S. stock market to complete a spectacular six-year bull-run and even if the rates rise, the initial phase would actually be good for stocks, as it would reflect an improving economy and a lower risk of deflation.
Further, the U.S. economy has been on a firmer footing, and could easily withstand China and global growth worries. Most economic data points have confirmed this trend. The second estimate of Q2 GDP data came in much higher than the initial estimate, the housing market is improving, consumer confidence is rising, and the unemployment rate dropped to a seven-and-half year low. While a lower oil price is hurting its sector earnings and creating deflationary pressures, it is leading to fatty wallets and increased consumer spending. Moreover, the recent beaten down prices has made the stocks cheap at current levels, suggesting solid attractive points.
However, heightened volatility and uncertainty have made investors cautious about their stock investments. It would thus be better to focus on fundamentals and invest in “high-quality” stocks through a basket form.
High Quality ETFs in Focus
High quality ETFs are generally rich on value characteristics as they focus on stocks with high quality scores based on three fundamentals – high return on equity, stable earnings growth and low financial leverage. This approach seeks investments in safer stocks and reduces volatility when compared to plain vanilla funds.
Further, academic research shows that high quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. More importantly, these stocks generally outperform in a crumbling market.
While several quality ETFs are currently available in the market, with most of them focusing on the dividend aspect, we have highlighted three funds that hinge on the broad quality aspects. These products have crushed the broad market fund (SPY – ETF report) by wide margins over the long term and year-to-date timeframe and are expected to continue doing so (read: 6 Exceptional ETFs Up Over 15% YTD).
MSCI USA Quality Factor ETF ((QUAL – ETF report))
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