Quality ETFs In Focus On Dovish Fed

The Fed minutes released on May 24 hinted at an interest rate hike in the June meeting given officials’ satisfaction with the economy’s progress. Already a 95% chance of a quarter-point hike is baked in at the June FOMC session, followed by another raise in September (read: ETF Strategies to Play the 7-Year High Benchmark Yield).

The Fed believes that the economy is likely to attain the central bank’s 2% goal in the medium term. The minutes from the Fed’s May meeting revealed that "a temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective."

Rate Hikes to be Gradual?

The Fed has already enacted a hike in March and is expected to enact two more in 2018. But some market watchers were betting on even four rate hikes this year. However, the latest minutes suggest that the Fed members are not being able to unite over whether the pace of rate hikes should accelerate. This uncertainty helped U.S. stocks rally.

Such dovishness in the Fed minutes led the two-year Treasury note yield to decline the maximum in 11 weeks. Two-year U.S. treasury bond yields dropped 6 bps to 2.53% on May 23. Also, renewed global trade fears, thanks to flare-ups in U.S.-China trade war tensions and tiffs with North Korea, pulled down benchmark U.S. treasury yield by 5 bps to 3.01% on May 23 from the previous day (read: Sector ETFs & Stocks to Win or Lose on Higher Rates).

Notably, U.S. President Trump has commented that any deal with China will need “a different structure” and also said on late Tuesday that a planned historic meeting between the United States and North Korea may not take place if Pyongyang fails to comply with certain conditions.

Why Quality ETFs Could be Good Investing Options

While the lack of hawkishness in the Fed minutes dragged down bond yields, steady U.S. economic growth may change market watchers’ view. Moreover, volatility will remain thanks to a plethora of geopolitical concerns.

So, it is better to stick to quality ETF picks. After all, progress related to geopolitical risks and the weak estimate revision trend for Q2 earnings point to the need for quality picks right now.

Given this, we highlight a few ETF options that are relatively safe and can help investors in the upcoming trading sessions that are likely to be riddled with Fed, Trump, trade tension and earnings risks.

FlexShares Quality Dividend Index ETF QDF

The fund looks to provide exposure to the growth potential of U.S. securities while offering dividends. The fund yields about 2.54%.

VanEck Vectors Morningstar Wide Moat ETF MOAT

The fund follows an index which tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund also calls for quality exposure.

WisdomTree U.S. Quality Dividend Growth Fund DGRW

The fund gives exposure to both growth and quality factors. The fund charges about 28 bps in fees. From a sector look, the fund has high exposure to Information Technology, Health Care and Industrials with about 21.6%, 18.4% and 17.6% allocation, respectively.

SPDR MSCI USA StrategicFactors (NYSE:QUS) ETF QUS

This fund holds stocks that have a combination of value, low volatility and quality factor strategies. The fund charges 15 bps per year. Information Technology, Health Care, Financials, Consumer Discretionary and Industrials are the top five sectors of the fund.

PowerShares S&P 500 Quality Portfolio SPHQ

SPHQ tracks the S&P 500 Quality Index. The Index looks to track 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.

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