ETF

US equities: how ETFs can help you cope with skittish stock markets

In its March meeting, the US Federal Reserve (Fed) surprised many by adjusting its rate hike path down
April 2019

Morgane Delledonne

Senior Associate, Investment Strategist, Exchange Traded Funds

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Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.

Opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

In its March meeting, the US Federal Reserve (Fed) surprised many by adjusting its rate hike path down to a distinctly dovish level. Reasons cited included US economic growth “slowing somewhat more than expected”, continuing trade issues, stubbornly low inflation, and even Brexit!

This caused notable moves in US financial markets, and as we move through 2019, markets are likely to be particularly sensitive to any data or policy that doesn’t hit consensus, which means increased volatility.

A higher-yielding equity strategy combined with a ‘quality’ tilt can harness returns from higher-growth US companies as well as de-risk US equity portfolios. Combining yield and quality can provide greater diversification benefits than ‘pure dividend’ strategies given the low historical correlations of the quality factor with other factors such as size, value, yield and momentum.

The MSCI USA Select Quality Yield index exhibits strong tilts towards quality(1), yield, and low volatility factors compared to its parent universe, the MSCI USA index. This bias to defensive characteristics has historically displayed lower risk versus the broader US equity market.

The chart below shows the distribution of the credit ratings of the constituents of the MSCI USA Select Quality Yield (SQY) index against a ‘pure dividend’ strategy as captured by the S&P 500 Dividend Aristocrats index, and the wider MSCI USA index. Nearly 75% of the MSCI USA SQY constituents have upper investment-grade ratings, while the S&P 500 Dividend Aristocrats had 59% in line with the MSCI USA index.

Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.

Opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The BMO MSCI USA Equity Income Leaders ETF, which aims to track the MSCI USA Select Quality Yield NTR $ index, rose by 11.7% in the year to the 29th of March 2019, outperforming the MSCI USA NTR $ index by 2.9%, due to an overweight in the defensive sectors that have performed well in the last quarter of 2018 amid trade tensions and weaker US economic data.

 

(1) Quality companies are characterised with low debt, stable earnings growth and high profitability.