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Buy Cheap, High-Quality, Winning Stocks with these ETFs - ETF News And Commentary

Neena Mishra

US stocks remain stuck in a range this year as investors continue to fret over the uncertainty regarding Fed’s rate hike, weak economic data points and wobbly corporate earnings. Despite these headwinds, stocks are likely to reward investors with positive returns for the seventh year in a row but returns this year may be lackluster.

As the easy money in stocks has already been made, investors will need to be more selective about their investments and look for companies with strong fundamentals and reasonable valuations. There are some ETFs that invest in such stocks and it’s no surprise they have been outperforming the market this year. (Read: Beat the Market with Momentum ETFs)

Is the Bull Market Vulnerable in its Seventh Year?

Recent economic data has surprised to the downside but most of the weakness can be attributed to the brutal weather and west coast port problems. Domestic economy is likely to rebound in the coming months with much needed help from cheaper oil prices.

Investors should also remember that the exact timing of the rate hike is rather irrelevant since it is almost certain that the Fed will raise rates only when the economy is strong enough to withstand higher rates. And history shows that stocks do well during the initial phase of rising rates, if the economy continues to improve. (Read: 5 ETFs for Your IRA Contribution)

Earnings slowdown –caused largely by the collapse in oil prices, surge in the US dollar and overseas weakness--is also making most investors nervous. Considering these factors have been known for a long time and are most likely already priced in, the backdrop doesn’t appear so hazy.

After more than six years of bull run, US stocks are not cheap; at the same time they are not terribly expensive either.  Further, they are still more attractive compared to most other asset classes. A recovering economy and accommodative monetary policy remain supportive of stocks.  (Read: 3 Ultra Cheap Value ETFs for Long Term Outperformance)

Invest in "Best" Stocks for Outperformance     

Overall market returns are likely to be muted this year and stocks will remain vulnerable to frequent sell-offs. In such an environment, investors need to invest in quality companies, still available at reasonable valuations, which will have much greater chances of outperformance this year.

Below, we highlight three ETFs that use unique methodologies to uncover “best” stocks.

ValueShares U.S. Quantitative Value ETF (QVAL)

QVAL uses a proprietary stock selection algorithm to invest in cheapest, highest quality value stocks. Starting with a universe of mostly mid to large cap US stocks, they first weed out companies that do not follow highest standards of accounting/ engage in financial statement manipulation or may incur financial distress.

In the next stage, they apply valuation screens to select stocks with low enterprise value relative to operating earnings. These value stocks are then ranked on the basis of their financial strength and long-term fundamentals to arrive at the final list of cheapest, highest quality stocks.

The ETF is actively managed and is thus a bit pricey with an expense ratio of 79 basis points per annum. So far, it had justified its higher fees by consistently beating the S&P 500 index since its inception. It has returned 10.0% over the past 3 months, compared to 4.3% return for the S&P 500 index.

Barron’s 400 ETF (BFOR)

As the name suggests, BFOR tracks the performance of the Barron’s 400 Index that looks to select high performing U.S. stocks based on four fundamental factors--growth, valuation, profitability and cash flow.  

Stocks selected on the basis of strong fundamentals are then screened for certain criteria regarding concentration, market capitalization and liquidity and eligible stocks are equally weighted in the index that is rebalanced semiannually. The fund charges an operating fees of 65 basis points. BFOR has returned 10.3% over the past 3 months.

Vident Core U.S. Equity Fund (VUSE)

VUSE uses a structured screening process to select higher quality stocks from the investable universe of about 2,000 companies that meet the initial requirements of a market capitalization greater than $500 million and average daily volume more than $1.5 million.

The process then removes the bottom 20% of companies within each sector that earn low scores in areas of 1) expense recognition 2) financial reporting and 3) corporate governance. In the final stage top one-third of the remaining companies within each sector are selected based on scores in the areas: of 1) governance (20%) 2) valuation (60%) and 3) momentum (20%).

The fund thus aims to put together the portfolio of high quality companies that exhibit positive momentum and are trading at attractive valuations. It charges a fee of 55 basis points for its “enhanced” indexing strategy. VUSE is up 6.7% in the past 3 months.



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