Playing market defense with high-quality ETFs

Amid rolling banking stress and ongoing inflation and recession issues, the flight to high-quality funds has turn into extra interesting for exchange-traded fund traders.

“The stronger stability sheet is unquestionably the principle driver and the principle standards to explain the standard of a sure inventory in our portfolio,” Anna Paglia, Invesco’s international head of ETFs and listed methods, informed CNBC’s Bob Pisani on “ETF Edge” on Monday.

Flows into Invesco’s S&P 500 Quality ETF (SPHQ) have accelerated in 2023, attracting greater than $906 billion for the reason that begin of the 12 months, in response to FactSet.

According to Invesco, the fund tracks the efficiency of S&P 500 shares with the highest-quality rating, which is calculated based mostly on three measures: return on fairness, accruals ratio and monetary leverage ratio. 

“Our purchasers are actually anxious about what they see within the market — excessive rates of interest, excessive inflation,” Paglia mentioned. “So, it isn’t a coincidence that you simply see prime quality and low volatility being within the driver’s seat.”

She mentioned that issues over tighter credit score and draw back threat to elevated revenue expectations are further elements pushing traders towards mounted earnings funds.

“This just isn’t actually an funding story for returns,” Paglia mentioned. “This is extra of a defensive story that performs effectively beneath the present market atmosphere.”

While measures of high quality would possibly fluctuate by fund or agency, frequent standards like regular stability sheets and money flows make the issue enticing in a unstable market.

But in a restoration stage, Scott Ladner, chief funding officer of Horizon Investments, instructed including “junk” methods to achieve extra publicity to the financial rebound.

“When you need a junk portfolio is once you’re coming by the trough,” Ladner mentioned in the identical phase Monday. “Because that is the time once you do need excessive leverage, you do need variability.”

While Ladner defined the advantages of junk-seeking methods, he affirmed that high quality remains to be the standout consider a slow-growth market atmosphere.

“It may present some type of security and hold individuals invested, or get them invested within the first place,” he mentioned. “That behavioral modification facet to investing in a high quality portfolio in a time of financial uncertainty will be simply as highly effective because the financial implications of doing that.”


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