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Wall Street has been struggling to find its solid footing owing to fears over financial instability and its contagion across the globe. Uncertainty about the Fed’s interest rate trajectory added to the woes. However, a series of recent data shows that the economy has been on the mend. This could provide an upward thrust to the stocks.

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

We have highlighted five ETFs targeting the niche strategy. iShares MSCI USA Quality Factor ETF (QUAL - Free Report), Invesco S&P 500 Quality ETF (SPHQ - Free Report), ALPS Barron's 400 ETF (BFOR - Free Report), FlexShares Quality Dividend Index Fund (QDF - Free Report) and SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) could enjoy smooth-trading and generate market-beating returns in the current market environment.

Banking Crisis

The woes started following the collapse of Silicon Valley Bank, which is regarded as the biggest bank failure since the global financial crisis. Silvergate Capital Corp and Signature Bank also joined the league. The failure of the banks has raised concerns that soaring interest rates are eroding balance sheets across the financial industry and sparked recession fears.

Then, Credit Suisse, the second-largest Swiss lender, aggravated the concerns after its largest shareholder ruled out any more investment in the bank. German giant Deutsche Bank (DB) also falls under the list of troubling banks after a steep rise in the cost of ensuring the bank’s debt against the risk of default. Deutsche’s credit default swaps reached over 220 basis points, the highest since late 2018.

Fed Actions

As expected, the Fed raised interest rates by 25 bps in the latest FOMC meeting, taking the range for the fed funds rate to 4.75-5%, the highest since October 2007. It signaled that an end to interest rate increases could be on the horizon and some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

Money market bets are now split between the Fed raising interest rates by 25 bps and a pause in its policy meeting in May, after being largely tilted toward a no-hike scenario at the end of last week.

Improving Macro Trends

The recent economic indicators pointed to modest growth in spending and production. Job gains picked up and were running at a robust pace. The unemployment rate has remained low, and inflation is still elevated. Inflation in the United States cooled down in February as the consumer price index rose 0.4% in the month, following a 0.5% increase in January. Annual inflation dropped from 6.4% to 6%, the smallest annual gain since September 2021, and is now down by one-third from its peak of more than 9% in June last year.

U.S. consumer confidence unexpectedly increased in March after two straight monthly declines, even as persistent inflation, bank collapses and anxiety over a possible recession weighed on American households.

iShares MSCI USA Quality Factor ETF (QUAL)

With an AUM of $25 billion, iShares MSCI USA Quality Factor ETF 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. QUAL holds 124 stocks in its basket, with each making up not more than a 5.4% share.

iShares MSCI USA Quality Factor ETF charges 15 bps of annual fees and trades an average daily volume of 1.6 million shares.

Invesco S&P 500 Quality ETF (SPHQ)

Invesco S&P 500 Quality ETF tracks the S&P 500 Quality Index, a benchmark of S&P 500 stocks with the highest-quality score based on three fundamental measures, such as return on equity, accruals ratio and the financial leverage ratio.

Holding 101 stocks in its basket, Invesco S&P 500 Quality ETF amassed $4.4 billion in its asset base and trades at an average daily volume of 645,000 shares. SPHQ charges 15 bps in fees per year.

ALPS Barron's 400 ETF (BFOR)

With an AUM of $122.9 million, ALPS Barron's 400 ETF follows the Barron's 400 Index, offering investors exposure to the high-performing securities of U.S. companies. It uses MarketGrader's fundamental analysis to select stocks based on the strength of their fundamentals in growth, value, profitability and cash flow and then screens such components for specific criteria regarding concentration, market capitalization and liquidity.

ALPS Barron's 400 ETF holds 400 stocks in its basket, with none making up for more than 0.3% of assets. BFOR charges 65 bps as annual fees and trades a volume of 1,000 shares per day on average.

FlexShares Quality Dividend Index Fund (QDF)

FlexShares Quality Dividend Index Fund follows the Northern Trust Quality Dividend Index and maximizes exposure to quality and dividends, while maintaining a beta near 1. QDF is home to 139 stocks in its basket, with none making up for more than 9% of assets.

FlexShares Quality Dividend Index Fund accumulated $1.5 billion in its asset base and trades an average daily volume of 47,000 shares. QDF charges 37 bps as fees per year from investors (read: Fearing a US Recession? 5 ETF Areas to Protect Your Portfolio).

SPDR MSCI USA StrategicFactors ETF (QUS)

SPDR MSCI USA StrategicFactors ETF offers exposure to stocks that combine low volatility, quality and value factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Capped Index. SPDR MSCI USA StrategicFactors ETF holds 627 stocks in its basket, with each accounting for less than 3.5% share.

SPDR MSCI USA StrategicFactors ETF attracted $919.2 million in its asset base and traded an average daily volume of 40,000 shares. QUS charges 15 bps of fees per year from investors.

Bottom Line

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

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