Once again, the received wisdom for the markets around interest rates has changed. Now, the narrative has turned to a higher for longer regime for rates after starting the year with several rate cuts on the cards. With high interest rates set to stick around, then, how should ETF investors respond? It may be time to revisit the benefits of quality ETFs, with their close screening of firms helping portfolios identify firms that can do well amid high rates.
See more: This Hidden Cost of Mutual Funds That Boosts ETFs
Why a quality approach? Quality investing screens can help fund managers identify firms better positioned for the current market environment. High interest rates put pressure on the economy in a myriad of ways, with firms facing higher borrowing costs as a key challenge.
A quality screen can sift through firms and identify firms with attributes like strong growth potential and fundamentals. The American Century U.S. Quality Growth ETF (QGRO ) for example screens stocks for sales, profitability, return on assets and return on equity.
QGRO looks to limit the risk in growth stocks, particularly, by leaning towards strong fundamentals and away from volatility. It looks to combine high-growth names with more stable growth firms.
That particular approach may appeal given the particular impact that high interest rates have on growth firms that rely on debt. What’s more, the economy is still doing well overall, so for investors who still want a solid growth allocation, a quality screen could really help.
On the other hand, investors can also consider the American Century U.S. Quality Value ETF (VALQ ). VALQ also screens for quality but this time looks among value stocks. While Both QGRO and VALQ charge 29 basis points (bps) to track their respective indexes.
QGRO has returned 14.4% over five years while VALQ has returned 8.6% in that time. With high interest rates beguiling investors, a pair of quality ETFs like VALQ and QGRO could appeal.
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