Stick to Quality as Geopolitical Risks Flood the Market

Even with a “phase one” U.S.-China trade deal agreement seemingly in place, the euphoria can only last for so long as more geopolitical risks begin to flood the market. When this happens, it suits investors to stick to quality funds in order to fend off a potential market downturn.

After finishing off 2019 with record highs in the major indexes, U.S. equities are stumbling as of late due to a U.S. airstrike in Iraq that killed a top Iranian general last week. As a result, oil prices soared and fears of a broader conflict with global ramifications spooked investors.

In times like this, quality can be key.

“Don’t reach for high beta or too much cyclicality,” Mike Wilson, the bank’s head of U.S. equity strategy, said in a note on Monday, per a CNBC report. “Continue to be choosy on growth stocks with quality earnings and cash flows that aren’t egregiously overvalued… In the near term as markets potentially correct, defensive stocks should have a good run/catch-up as US rates fall on geopolitical concerns and growth doubts.”

Quality Control

As the extended bull market continues to mature, investors are getting more strategic with their capital allocations, making the quality factor a stand-out focus that could propel itself though 2020. In particular, the investor interest in quality can be seen via the iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL).

The iShares Edge MSCI USA Quality Factor ETF seeks to track the investment results of an index that measures the performance of U.S. large- and mid-capitalization stocks as identified through three fundamental variables: return on equity, earnings variability and debt-to-equity.

Investor reasons to use QUAL:

  • Exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage)
  • Index-based access to a specific factor which has historically driven a significant part of companies’ risk and return1
  • Use to help manage exposure and risk within a stock allocation

With a low expense ratio of just 0.15%, QUAL has been a cost-efficient gainer with a 30.75% return year-to-date according to Morningstar’s performance figures.

Another fund to consider is the JPMorgan U.S. Quality Factor ETF (NYSEArca: JQUA). JQUA seeks investment results that closely correspond to the performance of the JP Morgan US Quality Factor Index. The fund will invest at least 80% of its assets in securities included in the underlying index. “Assets” means net assets, plus the amount of borrowing for investment purposes. The underlying index is comprised of U.S. equity securities selected to represent quality factor characteristics.

For more market trends, visit ETF