While there’s considerable debate when it comes to defining quality as an investment factor, something that’s not up for argument is the factor’s all-weather status.
That doesn’t mean quality stocks and the related exchange traded funds are infallible in bear markets, but it does imply quality strategies may subject investors to less downside when equities tumble, as is happening this year.
Something to consider is that while index providers aren’t uniform in their definitions of quality, one of the hallmarks of a quality company is prioritizing shareholder rewards. That makes an ETF such as the SmartETFs Dividend Builder ETF (DIVS) relevant in this conversation.
“Businesses, whether priced as value or growth, will weather this chapter in history with varying degrees of success. This reinforces the need for selectivity and further argues for a focus on companies with quality characteristics ― particularly strong balance sheets and healthy free cash flow to offer a buffer in the case of a slowdown or profit squeeze,” according to BlackRock research. “Quality stocks continue to be priced at a discount to the market and, we believe, have potential to outperform as investors look to enhance portfolio resilience amid the prevailing uncertainty.”
Not only is DIVS a dividend ETF, but it also prioritizes quality. In turn, many of its holdings are dividend growers – a trait that fits the bill as “quality.” For equity income investors taking a long-term view, that’s relevant because although high-dividend stocks are outperforming this year, equities with that designation often lack the quality attributes many DIVS holdings offer.
That’s an important consideration because with inflation seemingly unrelenting, dividend growth and ETFs such as DIVS are in focus.
“The ongoing transition in the economy and markets is likely to be bumpy. At this early stage, with inflation just having peaked, investors may be overestimating the speed at which shorter-term dislocations in the economy can normalize (e.g., strong employment alongside high inflation) and underestimating the magnitude and duration of the longer-lasting components of inflation (e.g., wages and shelter costs),” added BlackRock.
DIVS is relevant in the quality discussion in another way. The ETF is actively managed, meaning it has more freedom to identify quality than index-based rivals. That’s also a sign DIVS is up to the challenge of the fluidity in quality’s definition.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.