Markets Bounce Back: Still It Is Time For Quality ETFs?

There were no nerve-wracking new headwinds that may have prompted the recent historic selloff. Rising concerns over inflation and worries of faster rate hikes by the Federal Reserve and the start of policy tightening by other central banks amid recovering global fundamentals stirred the selloff (read: 5 Long/Short ETFs to Play in Market Crash).

However, a solid labor market, robust corporate earnings and upbeat consumer sentiments may open up buying opportunities in the coming days. After marking the largest one-day decline since 2011 on Feb 5, the S&P 500 gained more than 1.7% on Feb 6.

The three biggest ETFs, SPDR S&P 500 ETF (NYSE:SPY) (AX:SPY) , SPDR Dow Jones Industrial Average (SI:SPDR) ETF (V:DIA) and PowerShares QQQ ETF QQQ lost about 2%, 2.4% and 2.7%, respectively, on Feb 6.

Will Indexes Regain Strength Soon?

CNBC analysis using Kensho showed that the index traded positive only 60% of the time six days after such a rapid selloff, while the Dow Jones industrial average recovered just 62% of the time and the Nasdaq composite recoiled 56% of the time.

The article went on to explain that the market starts swinging higher probably after three months. “The S&P 500 and Dow trade positive 67 percent and 70 percent, respectively, three months after the S&P 500 pulls back 5 percent in a six-day period. The Nasdaq trades positive 66 percent of the time,” as per the article (read: Must-Follow ETF Moves as Finally Selloffs Set In).

There are varied views in the market. As per Cantor Fitzgerald Chief Market Strategist Peter Cecchini, “investors should go longthe S&P 500.” On the other hand, 50-year Wall Street veteran Art Cashin told CNBC lately“that investors should be patient and not get ahead of themselves as this thing sorts itself out.” In a nutshell, though indexes have recovered, no new tailwinds may hold the markets back from ripping higher.

iShares MSCI USA Quality Factor ETF QUAL

QUAL holds high quality large and mid-cap U.S. stocks identified through three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. It charges a low expense ratio of 15 basis points per year (read: What Yellen's Final Meeting Means for These ETFs).

PowerShares S&P 500 High Quality Portfolio SPHQ

The underlying S&P 500 Quality Index tracks the performance of stocks in the S&P 500 index that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio. The fund charges 29 bps in fees.

FlexShares Quality Dividend Index Fund QDF

The underlying index of the fund, the Northern Trust (NASDAQ:NTRS) Quality Dividend Index, is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with importance to long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index. The index is selected based on expected dividend payment and fundamental factors.

Barron’s 400 ETF BFOR

As the name suggests, BFOR tracks the performance of the Barron’s 400 Index that looks to select high performing U.S. stocks based on four fundamental factors — growth, valuation, profitability and cash flow.

Stocks selected on the basis of strong fundamentals are then screened for certain criteria regarding concentration, market capitalization and liquidity and eligible stocks are equally weighted in the index that is rebalanced semiannually. The fund charges operating fees of 65 basis points.

SPDR MSCI USA Quality Mix ETF QUS

This fund holds stocks that have a combination of value, low volatility and quality factor strategies. The fund charges 15 bps in fees.

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