Bet On Quality ETFs For A Volatile Market

Even though Wall Street is showing strength after a stupendous rally last quarter, surging new coronavirus cases has raised questions over continued recovery in economic activities, thereby making investors jittery.

Additionally, the International Monetary Fund lowered its global growth forecast for this year, citing that the pandemic has caused an unprecedented decline in global activity. It now expects the economy to shrink 4.9%, down from 3% contraction predicted in April. If the forecast comes true, it will represent the worst downturn since the Great Depression of the 1930s, far worse than the financial crisis of 2008-2010.

Further, tensions between the United States and China have been flaring up as the country is weighing a sweeping travel ban on Chinese Communist Party officials, according to the New York Times. China recently imposed travel restrictions on U.S. lawmakers, including Senators Ted Cruz and Marco Rubio.

Apart from these, weak second-quarter earnings expectation has undermined investors’ confidence. Total S&P 500 earnings are expected to be down 44.9% from the same period last year on 10.5% lower revenues. This would be the biggest quarterly profit decline since the financial crisis. All of the 16 Zacks sectors are expected to experience earnings declines and four sectors will likely lose money (declines in excess of -100%).

However, the Federal Reserve’s Beige Book survey showed that the U.S. saw an uptick in business activity in the beginning of July as states eased restrictions to contain the novel coronavirus pandemic. The slew of fiscal and monetary stimulus is expected to provide upside to the stock market.

Against such a backdrop, investors should focus on high-quality investing.

Why Quality Investing?

Quality stocks are rich in value characteristics with a 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.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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