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5 Smart Beta ETFs for Quality Market Exposure

This article was originally published on ETFTrends.com.

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 (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.

The Oppenheimer Russell 1000 Quality Factor ETF (OQAL) bets on higher quality companies in the hopes that they perform better than lower-quality companies. The fund screens for an equally-weighted composite of return on assets, change in asset turnover, accruals, and leverage, calculated based on information reported in the company’s most recent annual financial statement as of the last business day of the prior month.

The American Century STOXX U.S. Quality Value ETF (VALQ) tries to reflect the performance of the iSTOXX American Century USA Quality Value Index, which is made up of 900 largest publicly traded U.S. equity securities screened and weighted by fundamental measures of quality, value and income.

Additionally, the J.P. Morgan U.S. Quality Factor ETF (JQUA) is designed to provide exposure to high quality companies. JQUA tries to reflect the performance of the J.P. Morgan U.S. Quality Index, which is comprised of U.S. securities included in the Russell 1000 Index and selects constituents based on their quality as measured by profitability, solvency and earnings quality.

For more information on the smart beta strategy, visit our smart beta category.