After surging to peak levels at the end of August, the Wall Street is once again caught in a web of woes, including lingering trade uncertainty, ongoing troubles in emerging markets, chances of auto tariffs on other countries, Iran oil sanctions, another budget deadline, and the mid-term election in November.

Further, September is historically a weak month for the stock market and even worse in the mid-term election years. If we go by history, mid-term election widened losses for the Dow Jones and Nasdaq to 1% and 0.8%, respectively, from 0.7% and 0.5% for September, according to the Almanac data. However, S&P 500 losses narrowed slightly by 10 bps to an average of 0.4%.

While these factors cannot be ignored, strong corporate earnings and a booming economy have been the strong catalysts for the stock market rally this year. The dual tailwinds will continue to keep the positive momentum alive albeit at a slower pace.

The U.S. economy is witnessing the fastest pace of growth in nearly four years with a nearly two-decade low unemployment rate of 3.9% and 18-year high consumer confidence. Historic tax cuts, higher government spending, and deregulation are fueling growth. Additionally, the Fed is on track for gradual rates hike with the third increase of this year expected as soon as this month. A rising rate scenario also signals a strengthening economy, which is spurring growth in the stock market.

Given bullish fundamentals amid bouts of uncertainty, investors should focus on high-quality investing.

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 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 solid picks from the ETF and stock worlds, targeting this niche strategy. Any of these could enjoy smooth trading and generate market-beating returns in a rocky market.

ETF Picks   

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

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.

Expense Ratio: 0.15%
AUM: $6.3 billion
Average Daily Volume: 367,000 shares
Top Sector: Information Technology

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.

Expense Ratio: 0.15%
AUM: $1.4 billion
Average Daily Volume: 130,000 shares
Top Sector: Information Technology

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.

Expense Ratio: 0.65%
AUM: $194.7 million
Average Daily Volume: 12,000 shares
Top Sector: Industrials

FlexShares Quality Dividend Index Fund (QDF - Free Report)

This ETF follows the Northern Trust Quality Dividend Index and uses a proprietary model that includes factors like profitability, management efficiency and cash flow.

Expense Ratio: 0.37%
AUM: $1.9 billion
Average Daily Volume: 111,000 shares
Top Sector: Information Technology

SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)

This fund offers exposure to stocks that have a combination of value, low volatility, and quality factor strategies. This is done by tracking the MSCI USA Factor Mix A-Series Index.

Expense Ratio: 0.15%
AUM: $103.6 million
Average Daily Volume: 8,000 shares
Top Sector: Information Technology

Stock Picks

To find out the best stocks in this space, we have used the Zacks Stock Screener. The parameters include a Zacks Rank #1 (Strong Buy) or 2 (Buy), VGM Score of A or B, return on equity (ROE) of at least 10%, debt-to-equity ratio of less than 1, positive five-year historical EPS growth, double-digit current-year EPS growth, positive current-year earnings estimate revisions over the past 30 days and dividend yield of greater than 1%.

The Progressive Corporation (PGR - Free Report)

This Ohio-based company provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. 

Zacks Rank: #1
VGM Score: B
ROE: 21.84%
Debt/Equity: 0.37
5 Year Historical EPS Growth: 11.04%
Fiscal Year Earnings Growth: 71.10%
Positive Earnings Estimate Revisions Over 30 Days: 2.66%
Dividend Yield: 1.63%

Tractor Supply Company (TSCO - Free Report)

This Tennessee-based company is the largest operator of rural lifestyle retail stores in America.

Zacks Rank: #1
VGM Score: A
ROE: 35.24%
Debt/Equity: 0.39
5 Year Historical EPS Growth: 10.59%
Fiscal Year Earnings Growth: 25.83%
Positive Earnings Estimate Revisions Over 30 Days: 0.26%
Dividend Yield: 1.37%

D.R. Horton Inc. (DHI - Free Report)

This Texas-based company is engaged in the construction and sale of high-quality homes through its diverse brand portfolio that includes D.R. Horton, Emerald Homes, Express Homes, and Freedom Homes.

Zacks Rank: #1
VGM Score: A
ROE: 17.19%
Debt/Equity: 0.35
5 Year Historical EPS Growth: 21.85%
Fiscal Year Earnings Growth: 41.24%
Positive Earnings Estimate Revisions Over 30 Days: 0.55%
Dividend Yield: 1.11%

Vishay Intertechnology Inc. (VSH - Free Report)

This Pennsylvania-based company is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors, and capacitors).

Zacks Rank: #1
VGM Score: B
ROE: 18.51%
Debt/Equity: 0.55
5 Year Historical EPS Growth: 13.60%
Fiscal Year Earnings Growth: 39.86%
Positive Earnings Estimate Revisions Over 30 Days: 7.35%
Dividend Yield: 1.49%

Penske Automotive Group Inc. (PAG - Free Report)

This Michigan-based company is a leading acquirer, consolidator and operator of a franchised automobile and light truck dealerships and related businesses.

Zacks Rank: #2
VGM Score: A
ROE: 17.68%
Debt/Equity: 0.82
5 Year Historical EPS Growth: 12.15%
Fiscal Year Earnings Growth: 24.59%
Positive Earnings Estimate Revisions Over 30 Days: 0.46%
Dividend Yield: 2.74%

Bottom Line

Quality ETFs and stocks 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.