Signs of further economic weakening in July caused recession fears to spike as we head into the fall months. That said, quality companies exhibit strong balance sheets and stable earnings across market cycles. For advisors and investors looking to quality stocks in the second half, the Fidelity Quality Factor ETF (FQAL ) is worth consideration.
Signals of potential economic deterioration in early August resulted in sharp market drawdowns. A weaker-than-expected jobs report from July led to rising recession concerns amongst investors.
The jobs report, along with further declines in the Institute for Supply Management’s PMI in July, which dropped to 46.8%, called into question the narrative of a soft landing for some. A PMI reading below 50% generally indicates economic contraction.
As second-half uncertainty and recession worries spike heading into fall months, strategies that focus on the quality factor may prove attractive. Quality companies tend to outperform the broad market over time, according to Fidelity.
“Companies with strong financial profiles are well positioned for the remainder of the year,” explained Todd Rosenbluth, head of research at VettaFi. “During times of uncertainty, investors tend to look to firms with stability.”
Quality Investing With Fidelity
The perception of rising recession risk, a looming U.S. election cycle, and ongoing geopolitical risk all weigh on markets in the second half. Investors looking to add quality to their equity portfolio may do well to consider the Fidelity Quality Factor ETF (FQAL ).
See also: 3 Key Considerations That Set Fidelity’s Factor ETFs Apart
FQAL seeks to track the performance of the Fidelity U.S. Quality Factor Index. The index includes higher quality large and mid-cap U.S. companies than the broad market. The strategy begins with a starting universe comprised of the largest 1000 U.S. stocks by market cap. It then selects those securities that rate highest for quality within each sector, ending with a portfolio of roughly 100 stocks.
The quality factor score takes into account free cash flow margin and stability as well as return on invested capital. Securities within the banking industry are scored based on their return on equity and debt to assets.
Once the securities are selected, they are overweighted by the same amount within individual sectors. This approach seeks to reduce concentration in individual stocks by targeting broad exposure to the quality factor. The strategy also seeks to neutralize sector biases at each semi-annual rebalance so as to limit unintended sector bets.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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