Quality is a Key Driver in Today’s Volatile Markets | ETF Trends

In an equities environment as volatile as it is now, investors can look to quality when it comes to seeking areas where they can park their capital. This can apply to thematic areas, such as environmental, social, and governance (ESG) funds or smart-beta funds that focus on quality.

A couple of exchange-traded funds (ETF) to consider in this regard include the Direxion MSCI USA ESG – Leaders vs. Laggards ETF (NYSEArca: ESNG) and the Direxion S&P 500 High minus Low-Quality ETF (NYSEArca: QMJ).

In an Investor’s Business Daily article, David Mazza, managing director and head of product at Direxion, said ESNG “aims to offer more pronounced exposure to environmental, social and corporate governance leaders, while simultaneously having a short position in those that significantly lag behind, as defined by MSCI’s market-leading ESG metrics.”

“The ETF tracks an index which measures both the ESG rating as well as the rating trend of companies relative to their sector peers,” Mazza added. “Utilizing a 150/50 structure, the index methodology creates an extended exposure (equal to 150% of net assets at rebalance) to the 100 highest scoring ESG companies, while having a short position (50% of assets) to the 100 lowest scoring companies, in the MSCI USA universe, with a net long exposure of 100% (that is, no net leverage). It is the first ESG ETF of its kind offering such an exposure.”

On the other hand, there’s a smart beta strategy focusing on quality, but drills down even further—the best of the best when it comes to quality.

“Similarly, Direxion S&P 500 High Minus Low-Quality ETF (QMJ) utilizes a simple, capital-efficient 150/50 structure to seek to deliver increased exposure to the quality factor,” Mazza said. “The index and fund will target 150% exposure to the stocks with the highest-scoring measures of quality (including return on equity, financial leverage ratio, and accruals ratio) while maintaining a negative 50% exposure to low-quality stocks as defined by S&P from the universe of 500 stocks. It is also the first smart beta ETF of its kind.”

^SPXQ Chart

^SPXQ data by YCharts

Will a mass movement away from growth into more quality, safe investments be on the way? From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play—notably, the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG) and the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC).

RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.

For more relative market trends, visit our Relative Value Channel.