What Type of Factors to Look for in U.S. Stock ETFs

ETF investors who are heavy on U.S. equity exposure should look to quality for a defensive position and growth to capture further upside potential.

“Uncertainty surrounding trade tensions has sparked investor interest in more defensive factor exposures, like quality, while fervor has cooled for more cyclical factors such as value. At the same time, growth-oriented stocks have continued their momentum—although exhibiting bouts of volatility of late. Earnings have been the drivers of both performance and pullbacks,” Christopher Dhanraj, Director and Head of ETF Investment Strategy for BlackRock’s iShares, said in a note.

Investors look to focus on quality U.S. companies to bolster their portfolio have 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.

Push Through Volatility & Outrun Inflation

Exposure to quality stocks may be seen as a suitable defensive play with the potential to push through volatility and outrun inflation. These quality companies could continue to grow free cash flow and maintain healthy balance sheets during potentially rocky market environments, providing investors with a more stabilizing investment position in risk-off events.

Meanwhile, investors can still enhance their portfolios as the bull market extends with growth-oriented stocks that continue to perform despite the recent bouts of volatility. The growth style has outperformed the market in spite of being prone to sell-offs with strong corporate earnings supporting this year’s robust performance.

ETF investors may capture the growth style through growth-oriented stock ETFs, like the iShares S&P 500 Growth ETF (NYSEArca: IVW) and iShares Russell 1000 Growth ETF (NYSEArca: IWF). Additionally, the iShares MSCI USA Momentum Factor ETF (Cboe: MTUM) provides targeted exposure to the momentum factor, a specific factor that has historically driven a significant part of companies’ risk and return, and also includes a heavy tilt toward the growth style and outperforming technology stocks.

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