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Inflation has been playing foul on the stock market lately. The consumer price index for April jumped 4.2% from the year-ago level, representing the sharpest increase since September 2008 and raising concerns that the U.S. economy is overheating.

Rising commodity prices for almost everything from raw materials to food prices to shipping costs has made investors jittery that price pressures will force the central bank to tighten the policies earlier than expected. Additionally, the latest Fed minutes for the first time revealed the possibility of tapering the asset purchase program if the economy continues to show rapid progress. The central bank is currently buying $80 billion worth of Treasury securities and $40 billion worth of mortgage-backed securities per month.

Further, a flare-up in coronavirus cases in parts of Asia has sparked concerns over the pace of a global economic recovery. India, Japan, and other parts of Southeast Asia are battling a fresh surge in cases and tightening restrictions, with relatively slow vaccine rollouts and delays in reopening the economy. Rounds of the latest economic data on the front of manufacturing, jobs, housing, and consumer confidence have added to the chaos.

However, the economy is strongly recovering from the pandemic lows with a wider reach of vaccination, huge infrastructure and stimulus packages, and reopening economies. The combination has powered activities across all sectors and categories, resulting in increased consumer spending. In fact, the U.S. economy grew 6.4% annually in the first quarter, representing the second-strongest increase since 2003 and is expected to top 7% this year, which would be the fastest since 1984, per several economists. This would follow the 3.5% contraction in 2020, which was the worst performance in 74 years. Moreover, the astounding improvement in corporate earnings also bodes well for the stocks.

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 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.

Given this, we have highlighted five ETFs targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment.

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

With AUM of $20.6 billion, this fund provides exposure to large and mid-cap 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. It holds 124 stocks in its basket with each making up for no more than 4.1% share. The ETF charges 15 bps in annual fees and trades in an average daily volume of 978,000 shares.

Invesco S&P 500 Quality ETF (SPHQ - Free Report)

This fund tracks the 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. Holding 99 stocks in its basket, the ETF has amassed $2.7 billion in its asset base and trades in an average daily volume of 427,000 shares. It charges 15 bps in fees per year.

Barron's 400 ETF (BFOR - Free Report)

With AUM of $141.3 million, this ETF follows the Barron's 400 Index, which offers investors exposure to the high-performing securities of U.S. companies. It uses MarketGrader's fundamental analysis to select the stocks based on the strength of their fundamentals in growth, value, profitability, and cash flow and then screens such components for certain criteria regarding concentration, market capitalization and liquidity. The product holds 401 stocks in its basket with none making up for more than 0.31% of assets. It charges 65 bps in annual fees and trades in volume of 4,000 shares per day on average.

FlexShares Quality Dividend Index Fund (QDF - Free Report)

This ETF follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends while maintaining a beta near 1. It is home to 137 stocks in its basket with none making up for more than 7.3% of assets. The fund has amassed $1.6 billion in its asset base while trades in an average daily volume of 38,000 shares. It charges 37 bps in fees per year from investors.

SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)

This fund offers exposure to stocks that have a combination of low volatility, quality, and value factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index. It holds 619 stocks in its basket with each accounting for less than 3% share. QUS has attracted $923.5 million in its asset base while trades in an average daily volume of 36,000 shares. It charges 15 bps in fees per year from investors.

Bottom Line

Quality ETFs often provide hedge against market volatility. Adding any of the above-mentioned products to one’s long-term portfolio could be a good move given their creditworthiness and soundness.