Despite the recent hiccup in the equity market, U.S. stocks may continue to strengthen along with the expanding economy. Investors, though, may turn to quality companies and related exchange traded funds to pick out the best while limiting any further downside risks.
“We still see corporate earnings supported by sustained above-trend global growth, and retain our preference for equities over fixed income. But we reiterate our call to focus on portfolio resilience. Companies that disappoint on third-quarter earnings and fourth-quarter guidance risk being acutely punished. We like quality exposures within equities and prefer the U.S. within developed markets due to earnings resilience and stronger balance sheets,” BlackRock strategists, led by Richard Turnill, said in a research note.
ETF investors can also target quality companies through a targeted factor-based, smart beta strategy. For example, the iShares Edge MSCI USA Quality Factor ETF (Cboe: QUAL) is one ETF focusing on quality. QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks exhibiting quality characteristics as identified through racks U.S. large- and mid-capitalization stocks based on quality screens for three fundamental variables: return on equity, earnings variability and debt-to-equity.
The Invesco S&P 500 Quality ETF (NYSEArca: SPHQ) is one of the elder statesmen of the quality ETF category, having come to market in late 2005. The ETF’s quality tilt comes by way of emphasizing companies’ long-term earnings growth dividend-paying potential. The underlying index focuses on companies with the highest quality as determined by fundamental measures, including return on equity, accruals ratio and financial leverage ratio.