While the U.S. economy remains resilient and corporate America is generating steady earnings growth, short-term uncertainty weighs on the market. As investors try to navigate this time of mixed market, look to quality and momentum exchange traded funds to capture areas of strength.
“We expect the outlook to remain murky in the short-term. There are few indications that the U.S. and China are close to a reconciliation on trade disputes. We do not see either side willing to compromise. This warrants a focus on portfolio resilience. Bottom line: Strong earnings growth, particularly in the U.S., underpins our preference for equities over debt. We still like the momentum factor, along with a tilt toward quality for resilience,” BlackRock strategists, led by Richard Turnill, said in a research note.
BlackRock pointed to rising dissonance with macro uncertainty and gradually tightening financial conditions, coupled with strong economic and earnings growth.
U.S. equities remain the favored play. U.S. companies have pushed higher on another round of solid earnings results, with around 83% of U.S. companies beating second-quarter earnings estimates. Furthermore, the robust sales growth reveals the profit boost came from solid demand and not solely due to tax cuts. However, investors are looking for safety as many are steering toward global minimum volatility equities.
Consequently, investors who are more defensive may turn to quality U.S. companies to bolster their portfolio. There are a number of factor-specific ETF strategies to choose from. For instance, the iShares Edge MSCI USA Quality Factor ETF (Cboe: QUAL) tracks U.S. large- and mid-capitalization stocks based on quality screens for three fundamental variables: return on equity, earnings variability and debt-to-equity.
Additionally, while risk assets have priced in significant downside, any signs of diminished uncertainty could spur a swift rally in risk assets as prices catch up with the strong earnings growth, according to BlackRock.
Consequently, investors may look to something like the iShares MSCI USA Momentum Factor ETF (Cboe: MTUM), which provides targeted exposure to the momentum factor, a specific factor that has historically driven a significant part of companies’ risk and return.
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