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January Sends Warning for 2020: Play Quality ETFs & Stocks

Sanghamitra Saha

January 2020 was pretty volatile for the global markets with the month opening to Middle East tensions and ending with the rapid spread of coronavirus, mainly in China. Just in the middle of the month, the markets had a nice spell owing to the signing of the phase-one U.S.-China trade deal. But there was a bloodbath on the last day of January on rising fear about coronavirus and its adverse impact on the global economy.

Overall, the S&P 500-based ETF SPY and the Dow Jones-based ETF DIA have lost about 1% and 2.1%, respectively in the past one month (as of Jan 31, 2020). The Nasdaq-100-based ETF QQQ advanced about 1.4%. However, emerging market ETF EEM, China A-Shares ETF ASHR and Asia ETF AIA shed 6.2%, 10.9% and 5.8%, respectively (read: Wining & Losing ETF Areas on Coronavirus Outbreak).

Is It an Ominous Sign for 2020?

There is apparently a correlation between January’sperformance and full-year returns. According to Stock Trader’s Almanac, “going back to 1950, when the S&P 500 was positive in January, 86% of the time, the full year turned out to be up,” as quoted on CNBC. The track is even better in presidential election years like 2020. In an election year, when January sees stock gains, it is likely to be a positive one 100% of the time, with an average S&P 500 return of 16.6%, according to Bank of America.

Apart from coronavirus, 2020 is likely to be an edgy one as it is an election year. “Elevated policy uncertainty usually leads to lower equity valuations and higher implied volatility in the months ahead of Election Day,” per Ben Snider, Goldman Sachs equity strategist, as quoted on CNBC.

But then the track record of market performances in presidential election years is not that bad. Since 1928, the return of the S&P 500 Index has been positive in 19 years out of 23 years. It means investing in stocks in election years is not imprudent, it is just that one has to be a bit careful.

Add Quality to Your Portfolio

In such a scenario, investors can seek safety in high-quality stocks and the related ETFs. Quality stocks are generally rich in value characteristics like strong return on equity, low earnings variability, higher free cash margins and low debt to equity.

ETF Picks

Thanks to the above-average and high-quality traits, quality ETFs may go a long way in protecting one’s portfolio in turbulent times. Below we highlight three such quality ETFs that are poised to be on investors’ radar.

SPDR MSCI USA StrategicFactors ETF (QUS)

The underlying MSCI USA Factor Mix A-Series Index measures the equity market performance of large and mid-cap companies across the U.S. equity market. It aims to represent the performance of a combination of three factors: value, quality, and low volatility. The fund has a Zacks Rank #2 (Buy).

VanEck Vectors Morningstar Wide Moat ETF (MOAT)

The fund follows an index which tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund also calls for quality exposure.

iShares Edge MSCI USA Quality Factor (QUAL)

The fund looks to follow large- and mid-cap U.S. stocks displaying positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage).

Stock Picks

We highlight stocks with return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, current-year EPS growth rate at least 5% and dividend yield greater than 2%. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Procter & Gamble Company PG

It is a branded consumer products company with market in more than 180 countries.It’s products are marketed primarily through grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high frequency stores and pharmacies.

Zacks Rank: #2
ROE (TTM): 27.14%
Debt/Equity: 0.42
5 Year Historical EPS Growth: 3.75%
Current Year’s Estimated Earnings Growth: 10.47%
Dividend Yield: 2.39%

State Street Corporation (STT)

It provides a range of products and services for institutional investors worldwide through its subsidiaries.

Zacks Rank: #1
ROE (TTM): 11.79%
Debt/Equity: 0.58
5 Year Historical EPS Growth: 7.88%
Current Year’s Estimated Earnings Growth: 12.68%
Dividend Yield: 2.75%

H&R Block Inc. (HRB)

It is a leading provider of tax preparation services.

Zacks Rank: #1
ROE (TTM): 332.04%
Debt/Equity: -17.25
5 Year Historical EPS Growth: 8.76%
Current Year’s Estimated Earnings Growth: 14.11%
Dividend Yield: 4.48%

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State Street Corporation (STT) : Free Stock Analysis Report
 
Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR): ETF Research Reports
 
VanEck Vectors Morningstar Wide Moat ETF (MOAT): ETF Research Reports
 
iShares Asia 50 ETF (AIA): ETF Research Reports
 
iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
 
SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports
 
Procter & Gamble Company (The) (PG) : Free Stock Analysis Report
 
H&R Block, Inc. (HRB) : Free Stock Analysis Report
 
iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
 
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