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Beat the Market With Quality ETFs & Stocks

Sweta Killa
These companies aren't just beating on earnings, their stocks are also on fire, hitting new 5-year highs.

Signs of progress in U.S.-China trade negotiations, a dovish Fed and strong labor market pushed Wall Street higher this year. But the positive trend seems to be reversing lately as the latest batch of economic data across the world has aggravated global growth slowdown concerns and dimmed the prospects of a U.S.-China deal.

This is especially true as European Commission (EU) last week slashed economic growth forecast for the Eurozone, comprising 19 counties that use euro, to 1.3% from the previous projection of 1.9%. The EU cited sharp deterioration in global trade and China’s slowdown as the economy’s major dampeners. Meanwhile, the Bank of England warned that the economy is on track for the weakest growth this year since the global financial crisis given Brexit uncertainty. As such, the bank cut the economic growth forecast for this year from 1.7% to 1.2% (read: Worried About European Growth? Play These 5 ETFs).

Chinese factory activity contracted for the second consecutive month in January, indicating further cooling of the economy and heightened the risk of global slowdown.

Further, the World Bank recently cut global growth forecast to 2.9% for this year from the previous projection of 3%, citing rising trade tension, weakening manufacturing activity and growing financial stress in emerging-market countries. The International Monetary Fund also lowered its growth forecast by 0.2 percentage points to 3.5% on account of weakness in Germany and Turkey. Also, the agency is concerned about the failure to resolve trade tensions that could further destabilize a slowing global economy.

Moreover, latest report shows that U.S. President Donald Trump and Chinese President Xi Jinping are unlikely to meet before the Mar 1 deadline set to reach a trade deal.

Weakening economies in China and Europe coupled with a looming trade tensions remains an overhang on a strong U.S. economy. Against such a backdrop, investors should focus on high-quality investing.

Why Quality Investing?

Quality stocks are rich in value characteristics with healthy balance sheet, high return on capital, low volatility, elevated margins, and a track record 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.

Given this, we have highlighted five ETFs & stocks targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.

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: $9.3 billion
Average Daily Volume: 1.2 million 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: Why You Should Buy High Quality ETFs for 2019).

Expense Ratio: 0.15%
AUM: $1.3 billion
Average Daily Volume: 349,000 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: $157.5 million
Average Daily Volume: 11,000 shares
Top Sector: Industrials

FlexShares Quality Dividend Index Fund QDF

This ETF follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends while maintaining a beta near 1.

Expense Ratio: 0.37%
AUM: $1.7 billion
Average Daily Volume: 130,000 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 (read: Best ETF Ideas for 2019).

Expense Ratio: 0.15%
AUM: $166 million
Average Daily Volume: 20,000 shares
Top Sector: Information Technology

Stock Picks

To find out the best stocks in this space, we have used the Zacks Stock Screener. The parameters include a Zacks Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, double-digit current-year EPS growth, positive current-year earnings estimate revisions over the past 30 days and dividend yield of greater than 1%.

The Allstate Corporation ALL

This is the largest publicly held personal lines property and casualty insurer in America, serving more than 16 million households nationwide (read: Q4 Earnings Drive Insurance ETFs Higher).

Zacks Rank: #2
VGM Score: B
ROE: 14%
Debt/Equity: 0.33
5 Year Historical EPS Growth: 8.55%
Fiscal Year Earnings Growth: 14.50%
Positive Earnings Estimate Revisions Over 30 Days: 0.37%
Dividend Yield: 1.99%

Steelcase Inc. SCS

This is a designer and manufacturer of products used to create high-performance work environments. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zacks Rank: #1
VGM Score: A
ROE: 15.91%
Debt/Equity: 0.34
5 Year Historical EPS Growth: 3.18%
Fiscal Year Earnings Growth: 75.8%
Positive Earnings Estimate Revisions Over 30 Days: 29.67%
Dividend Yield: 3.23%

The Progressive Corporation PGR

This provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States.

Zacks Rank: #1
VGM Score: B
ROE: 24.54%
Debt/Equity: 0.41
5 Year Historical EPS Growth: 17.26%
Fiscal Year Earnings Growth: 13.35%
Positive Earnings Estimate Revisions Over 30 Days: 2.02%
Dividend Yield: 3.68%

Alaska Air Group Inc. ALK

Alaska Air Group, through its subsidiaries, provides passengers and cargo air transportation service.

Zacks Rank: #2
VGM Score: B
ROE: 15.20%
Debt/Equity: 0.43
5 Year Historical EPS Growth: 11.27%
Fiscal Year Earnings Growth: 50.45%
Positive Earnings Estimate Revisions Over 30 Days: 4.54%
Dividend Yield: 1.96%

Southwest Airlines Co. LUV

This is a major domestic airline that provides primarily short-haul, high-frequency, point-to-point, low-fare service (read: Airlines ETF Riding High on Q4 Earnings).

Zacks Rank: #2
VGM Score: A
ROE: 24.56%
Debt/Equity: 0.45
5 Year Historical EPS Growth: 21.16%
Fiscal Year Earnings Growth: 21.23%
Positive Earnings Estimate Revisions Over 30 Days: 7.33%
Dividend Yield: 1.11%

Bottom Line

Quality ETFs and stocks 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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