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5 Quality ETFs for a Healthy Portfolio

Sweta Killa
Eni (E) seems to be a good value pick, as it has decent revenue metrics to back up its earnings, and is seeing solid earnings estimate revisions as well.

After registering the best quarterly gains in many years, Wall Street is once again caught in a web of woes, including rising interest rates and the resultant inflationary pressure, trade uncertainty, Iran oil sanctions, Italy political turbulence, Saudi tensions, and the mid-term U.S. election in November (read: Top and Flop ETFs of Last Week).

While these factors cannot be ignored, strong corporate earnings and a booming economy have been strong catalysts to the stock market rally this year. The dual tailwinds will continue to keep the positive momentum alive albeit at a slower pace.

The U.S. economy is witnessing the fastest pace of growth in nearly four years with a nearly 50-year low unemployment rate of 3.7% and 18-year high consumer confidence. Historic tax cuts, higher government spending and deregulation are fueling growth. Additionally, the Fed is on track for gradual rate hikes with the fourth increase of this year expected at the end of the year. A rising rate scenario also signals a strengthening economy, which is spurring growth in the stock market.

Given bullish fundamentals amid bouts of uncertainty, investors should focus on high-quality investing.

Why Quality Investing?

Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term (read: Sector ETFs & Stocks to Bet for Q3 Earnings).

Given this, we have highlighted five ETFs targeting this niche strategy. Any of these could enjoy smooth trading and generate market-beating returns in a rocky market.

ETF Picks    

iShares Edge MSCI USA Quality Factor ETF QUAL

This fund provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth, and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index.

Expense Ratio: 0.15%
AUM: $7 billion
Average Daily Volume: 442,000 shares
Top Sector: Information Technology

Invesco S&P 500 Quality ETF SPHQ

This fund tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks that have the highest-quality score based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio (read: 5 Tech ETFs That Tumbled Most on Broad Market Rout).

Expense Ratio: 0.15%
AUM: $1.3 billion
Average Daily Volume: 147,000 shares
Top Sector: Information Technology

Barron's 400 ETF BFOR

This ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark uses the MarketGrader's fundamental analysis to select America’s highest-performing stocks based on growth, valuation, profitability and cash flow.

Expense Ratio: 0.65%
AUM: $176.6 million
Average Daily Volume: 8,000 shares
Top Sector: Industrials

FlexShares Quality Dividend Index Fund QDF

This ETF follows the Northern Trust Quality Dividend Index and uses a proprietary model that includes factors like profitability, management efficiency and cash flow (read: Winning ETF Strategies for the Fourth Quarter).

Expense Ratio: 0.37%
AUM: $1.8 billion
Average Daily Volume: 110,000 shares
Top Sector: Information Technology

SPDR MSCI USA StrategicFactors ETF QUS

This fund offers exposure to stocks that have a combination of value, low volatility and quality factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index.

Expense Ratio: 0.15%
AUM: $107.4 million
Average Daily Volume: 8,000 shares
Top Sector: Information Technology

Bottom Line

Quality ETFs often provide hedge against market volatility. Adding any of the abovementioned products to one’s long-term portfolio could be a good move given their credit worthiness and soundness.

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SPDR-MSCI US SF (QUS): ETF Research Reports
PWRSH-SP5 HQ (SPHQ): ETF Research Reports
FLEXS-QLTY DIV (QDF): ETF Research Reports
ISHARS-MS US QF (QUAL): ETF Research Reports
BARRONS-400 ETF (BFOR): ETF Research Reports
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