5 Quality ETFs And Stocks For Outperformance

The stock market has been exhibiting volatility in the past few weeks. While geopolitical tensions, renewed fears over the implementation of President Donald Trump’s pro-growth agenda, an uncertain Fed policy and high stock valuations are weighing on the stocks, strong corporate earnings, and improving health of economies around the world act as tailwinds.


This is especially true as the economy has been on a solid growth path buoyed by an impressive labor market, increase in wages, and higher consumer spending. U.S. GDP growth expanded 2.6% annually in the second quarter, which is double the first-quarter growth of 1.2% and represents the fastest growth since the third quarter of last year, when the economy grew 2.8%.

Consumers also appear to be more optimistic with the University of Michigan’s consumer sentiment rising to the highest level since January, reflecting confidence in the outlook for the economy. Further, retail sales recorded the biggest increase in seven months in July.

Given improving economic fundamentals and heightened uncertainty, investors should focus on high-quality investing through a basket form.

Why Quality Investing?

Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These stocks 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 solid picks each from the ETF and stock worlds, targeting this niche strategy. Any of these could enjoy smooth trading and outperform the U.S. market in the coming months.

ETF Picks

iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)


This fund provides exposure to 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. Holding 125 securities in its basket, it is moderately concentrated across sectors with each holding less than 6.3% share. Information technology, financials and healthcare are the top three sectors. The product has amassed $3.4 billion in its asset base and charges just 15 bps in annual fees from investors.

PowerShares S&P 500 Quality Portfolio (SPHQ - Free Report)

This fund tracks the S 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. This approach has resulted in a basket of 99 stocks with each holding less than 5.3% of total assets. The fund is skewed toward industrials at 22.4%, followed by information technology (18.2%), consumer discretionary (16.5%) and consumer staples (15.2%). It has managed $1.3 billion in AUM and charges 29 bps in annual fees.  

Barron's 400 ETF (BFOR - Free Report)

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. It holds 399 stocks in its basket with each accounting for less than 1.1% share. Information technology, consumer discretionary, financials, healthcare and industrial are the top five sectors with double-digit exposure each. BFOR has lower AUM of $195.1 million and a higher expense ratio of 0.65%.

FlexShares Quality Dividend Index Fund (QDF - Free Report)

This ETF follows the Northern Trust Quality Dividend Index and seeks to maximize exposure to quality and dividends while maintaining a beta near 1. In total, it holds 146 securities with each accounting for less than 3.3% share. Information technology, financials, industrials, consumer staples and healthcare are the top five sectors with double-digit exposure each. QDF is popular with AUM of $1.7 billion and has an expense ratio of 0.37%.

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