Investors have recently embraced defensive sectors and strategies. One way of playing some defense in volatile climates is to emphasize the quality factor. Exchange traded funds that can help with that objective include the SPDR MSCI Quality Mix USA ETF (NYSEArca: QUS) and the SPDR S&P Dividend ETF (NYSEArca: SDY).
QUS, which is three and a half years old, tracks the equally-weighted MSCI USA Quality Mix A-Series Index, which is a combination of the MSCI USA Value Weighted, MSCI USA Minimum Volatility and MSCI USA Quality Indexes.
“Adding more quality companies with high profit margins and healthy balance sheets at a reasonable price may provide more resilience and cushion some downside risks,” said State Street in a recent note. “And blending differentiated factor exposures may create a more balanced profile to navigate this downhill climb. The MSCI USA Factor Mix A-Series Capped Index—a blend of quality, value and minimum volatility factors—stood strong during the October and November selloffs, providing a smoother return path than single factors.”
SDY holds firms that have a minimum dividend increase streak of 20 years. Moreover, SDY follows a yield-weighting methodology that allocates a larger weight toward those with higher yields, so the portfolio leans toward more mid-sized companies. While SDY mandates member firms have dividend increase streaks of at least 20 years, many of its 100-plus holdings have longer payout increase streaks than that.
The $136.31 million QUS, which is more than three and a half years old, holds more than 600 stocks. The fund devotes over 23% of its weight to the technology sector while the healthcare and financial services sectors combine for nearly 26% of its weight. None of the holdings in QUS command weights of more than 2.70%.
Year-to-date, both QUS and SDY are outperforming the S&P 500. SDY, the dividend aristocrats ETF, has also been 340 basis points less volatile than the S&P 500 this year.
“Our research also shows that long-term dividend growth companies exhibit higher quality traits in terms of higher profitability, stronger balance sheets and less earnings variability than pure high dividend companies,” according to State Street. “These higher quality traits have translated into persistent outperformance over the broad market, as well as high dividend yield strategies, when the broad market was down.”
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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.