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Why You Should Buy High Quality ETFs for 2019

Neena Mishra

Stocks have staged a nice comeback in 2019 after a brutal sell-off late last year. While progress in US-China trade talks is seen as the main reason behind the recent rally, better than expected earnings and Fed’s dovish tone have also supported stocks.

At the same time, there are still many uncertainties. That’s why investors have been pouring a lot of money into quality ETF in 2019. These ETFs hold stocks with excellent earnings record and strong balance sheets.  Such stocks hold up rather well during market swings.

Many academic studies have demonstrated that high quality companies--as determined by factors such as high earnings quality and low leverage-- consistently deliver better risk adjusted returns than the broader market over the long term.

An academic paper " Quality Minus Junk " studied quality stocks--defined as those with high profits, high growth, low risk, and high payouts, and found that these stocks yield above-average risk-adjusted returns. The study was based on a broad sample of stocks covering 24 developed countries between 1986 and 2012.

The iShares MSCI USA Quality Factor ETF (QUAL) holds high quality large and mid-cap US stocks identified through three main fundamental variables: high return on equity, stable year-over-year earnings growth and low financial leverage.

Its top holdings include Johnson & Johnson (JNJ), Apple (AAPL), MasterCard (MA) and Visa (V).

The PowerShares S&P 500 High Quality Portfolio (SPHQ) selects stocks from the S&P 500 index by ROE, accruals ratio and financial leverage ratio.

Proctor & Gamble (PG), Microsoft (MSFT) and Apple (AAPL) are among the top  holdings.

To learn more about these ETFs, please watch the short video above.

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