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Inflation in the United States picked up in December after two consecutive months of drop. The Consumer Price Index grew at an annual rate of 3.4% in December, up from 3.1% annual inflation in November and 3.2% expected by economists.
Higher costs for housing, energy, dining out and car insurance led to an increase in inflation. Excluding volatile food and energy costs, so-called core prices rose just 0.3% from the last month, unchanged from November's increase. Core prices were up 3.9% year over year, down from November's 4% annual gain.
The data has dampened market expectations about an interest rate hike as soon as March. Against such a backdrop, investors should focus on high-quality investing. Quality stocks possess a sustainable competitive advantage and demonstrate consistent growth, profitability and operational excellence over time. We have highlighted solid reasons for investing in quality stocks.
Long-Term Outperformance: Historically, high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. This is because quality companies have strong fundamentals that can weather economic downturns better than their weaker counterparts.
Consistent Profitability: Quality companies tend to have a high return on equity (ROE), return on invested capital (ROIC) and profit margins. These are indicators of a company's ability to generate profit consistently.
Lower Volatility: Quality stocks tend to exhibit lower volatility compared to the broader market. Their robust business models and financial strength make them less susceptible to market fluctuations, leading to a smoother investment journey.
Defensive Nature: During economic downturns, quality stocks often prove more resilient as they have strong balance sheets, low levels of debt and cash reserves to tide them over during challenging times (read: Inverse ETFs Soar at the Start of 2024).
Compounding Effect: Investing in quality companies allows investors to benefit from the power of compounding. As these companies consistently grow their earnings and reinvest them, shareholders can achieve exponential returns over time.
Strong Brand and Moat: Quality companies often possess strong brands and competitive moats, which protect them from competition. This can lead to a sustainable competitive advantage, ensuring long-term profitability.
Transparency and Governance: High-quality companies usually have transparent financial reporting and sound corporate governance. This reduces the chances of any unwelcome surprises and can potentially reduce investment risk.
Value Preservation: In uncertain or declining market environments, quality stocks can serve as a relative safe haven, preserving capital better than more speculative or lower-quality investments.
Growth Potential: Even if they are established leaders, many quality companies still have significant room for growth, especially if they operate in expanding industries or have opportunities to penetrate new markets.
Dividend Payouts: Quality companies often have a history of paying consistent dividends, providing a source of income for investors. Moreover, since they are usually in a strong financial position, there's a good chance for steady or even increasing dividend payouts in the future (read: 5 Dividend ETFs That Beat S&P 500 in 2023).
ETFs to Invest In
While there are several funds available in the space, we have highlighted five most popular ETFs targeting the niche strategy:
With an AUM of $36 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 125 stocks in its basket, with each making up not more than 5% share.
iShares MSCI USA Quality Factor ETF charges 15 bps of annual fees and trades in an average daily volume of 1.5 million shares.
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 financial leverage ratio.
Holding 101 stocks in its basket, Invesco S&P 500 Quality ETF amassed $7 billion in its asset base and trades at an average daily volume of 981,000 shares. SPHQ charges 15 bps in fees per year.
JPMorgan U.S. Quality Factor ETF provides domestic equity exposure with a focus on companies with strong quality and profitability characteristics and the potential to enhance returns. It tracks the JP Morgan US Quality Factor Index and holds 245 stocks in its basket, with each accounting for no more than 2.3% share.
JPMorgan U.S. Quality Factor ETF has amassed $3.3 billion in its asset base and charges 12 bps in fees per year. It trades in average daily volume of 636,000 shares (read: 5 ETF Zones Scaling New Highs at the Start of 2024).
FlexShares Quality Dividend Index Fund (QDF - Free Report)
FlexShares Quality Dividend Index Fund is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index. QDF is home to 134 stocks in its basket, with none making up for more than 9% of the assets.
FlexShares Quality Dividend Index Fund has accumulated $1.6 billion in its asset base and trades in an average daily volume of 47,000 shares. QDF charges 37 bps as fees per year from investors.
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 608 stocks in its basket, with each accounting for less than 3% share.
SPDR MSCI USA StrategicFactors ETF attracted $1.1 billion in its asset base and trades in an average daily volume of 29,000 shares. QUS charges 15 bps of fees per year from investors.
Bottom Line
Quality ETFs often provide a hedge against market volatility and uncertainty. Adding any of the abovementioned products to one’s long-term portfolio could be a healthy move, given their creditworthiness and soundness.
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Inflation Rises in December: Bet on Quality ETFs
Inflation in the United States picked up in December after two consecutive months of drop. The Consumer Price Index grew at an annual rate of 3.4% in December, up from 3.1% annual inflation in November and 3.2% expected by economists.
Higher costs for housing, energy, dining out and car insurance led to an increase in inflation. Excluding volatile food and energy costs, so-called core prices rose just 0.3% from the last month, unchanged from November's increase. Core prices were up 3.9% year over year, down from November's 4% annual gain.
The data has dampened market expectations about an interest rate hike as soon as March. Against such a backdrop, investors should focus on high-quality investing. Quality stocks possess a sustainable competitive advantage and demonstrate consistent growth, profitability and operational excellence over time. We have highlighted solid reasons for investing in quality stocks.
Long-Term Outperformance: Historically, high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. This is because quality companies have strong fundamentals that can weather economic downturns better than their weaker counterparts.
Consistent Profitability: Quality companies tend to have a high return on equity (ROE), return on invested capital (ROIC) and profit margins. These are indicators of a company's ability to generate profit consistently.
Lower Volatility: Quality stocks tend to exhibit lower volatility compared to the broader market. Their robust business models and financial strength make them less susceptible to market fluctuations, leading to a smoother investment journey.
Defensive Nature: During economic downturns, quality stocks often prove more resilient as they have strong balance sheets, low levels of debt and cash reserves to tide them over during challenging times (read: Inverse ETFs Soar at the Start of 2024).
Compounding Effect: Investing in quality companies allows investors to benefit from the power of compounding. As these companies consistently grow their earnings and reinvest them, shareholders can achieve exponential returns over time.
Strong Brand and Moat: Quality companies often possess strong brands and competitive moats, which protect them from competition. This can lead to a sustainable competitive advantage, ensuring long-term profitability.
Transparency and Governance: High-quality companies usually have transparent financial reporting and sound corporate governance. This reduces the chances of any unwelcome surprises and can potentially reduce investment risk.
Value Preservation: In uncertain or declining market environments, quality stocks can serve as a relative safe haven, preserving capital better than more speculative or lower-quality investments.
Growth Potential: Even if they are established leaders, many quality companies still have significant room for growth, especially if they operate in expanding industries or have opportunities to penetrate new markets.
Dividend Payouts: Quality companies often have a history of paying consistent dividends, providing a source of income for investors. Moreover, since they are usually in a strong financial position, there's a good chance for steady or even increasing dividend payouts in the future (read: 5 Dividend ETFs That Beat S&P 500 in 2023).
ETFs to Invest In
While there are several funds available in the space, we have highlighted five most popular ETFs targeting the niche strategy:
iShares MSCI USA Quality Factor ETF (QUAL - Free Report)
With an AUM of $36 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 125 stocks in its basket, with each making up not more than 5% share.
iShares MSCI USA Quality Factor ETF charges 15 bps of annual fees and trades in an average daily volume of 1.5 million shares.
Invesco S&P 500 Quality ETF (SPHQ - Free Report)
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 financial leverage ratio.
Holding 101 stocks in its basket, Invesco S&P 500 Quality ETF amassed $7 billion in its asset base and trades at an average daily volume of 981,000 shares. SPHQ charges 15 bps in fees per year.
JPMorgan U.S. Quality Factor ETF (JQUA - Free Report)
JPMorgan U.S. Quality Factor ETF provides domestic equity exposure with a focus on companies with strong quality and profitability characteristics and the potential to enhance returns. It tracks the JP Morgan US Quality Factor Index and holds 245 stocks in its basket, with each accounting for no more than 2.3% share.
JPMorgan U.S. Quality Factor ETF has amassed $3.3 billion in its asset base and charges 12 bps in fees per year. It trades in average daily volume of 636,000 shares (read: 5 ETF Zones Scaling New Highs at the Start of 2024).
FlexShares Quality Dividend Index Fund (QDF - Free Report)
FlexShares Quality Dividend Index Fund is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index. QDF is home to 134 stocks in its basket, with none making up for more than 9% of the assets.
FlexShares Quality Dividend Index Fund has accumulated $1.6 billion in its asset base and trades in an average daily volume of 47,000 shares. QDF charges 37 bps as fees per year from investors.
SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)
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 608 stocks in its basket, with each accounting for less than 3% share.
SPDR MSCI USA StrategicFactors ETF attracted $1.1 billion in its asset base and trades in an average daily volume of 29,000 shares. QUS charges 15 bps of fees per year from investors.
Bottom Line
Quality ETFs often provide a hedge against market volatility and uncertainty. Adding any of the abovementioned products to one’s long-term portfolio could be a healthy move, given their creditworthiness and soundness.