Quality US Equities Lay Path To Gains In 2024: 3 ETFs To Consider

State Street Global Advisors is looking toward quality U.S. equities to provide gains and outperform in 2024.

As high rates stifle growth and increase volatility, investors would be looking for potential gains with stability.

In a 2024 ETF Market Outlook, Michael W Arone, CFA Chief Investment Strategist at State Street Global Advisors, projects what investors may expect from the markets as we head into 2024.

Also Read: 60/40 Portfolio Bounces Back From 2022 Slump: Is It The Right Investment Strategy For 2024?

2024 Gains May Meet Some Challenges

In 2023, global equities, led by U.S. large-cap growth stocks, delivered substantial gains, driven primarily by multiple expansions.

Looking ahead, investors expect the shift toward earnings growth. The journey to 2024 gains in the U.S. may meet with certain challenges, notes Arone.

Third-quarter (Q3) earnings reports revealed soft demand outlook, with lower top-line growth relative to bottom-line growth. Despite a projected record-high operating margin of 17% in 2024, concerns arise due to the deceleration of GDP growth and interest rates exceeding 4%, posing a challenge to further margin expansion. Moreover, higher interest rates are impacting corporate profits and balance sheets.

Thus, large caps, with longer debt maturities, are better positioned for a slowing economy with rising financing costs.

Read: Worried About Renewed Recession Fears? Here Are A Few Large-Cap Stocks That Could Protect Your Portfolio

Quality Comes At Play

This is where quality comes into play. High-quality companies tend to focus on stable earnings, strong pricing power, and healthy balance sheets. These companies are poised to weather margin pressure and high financing costs. They are also projected to outpace the broad market in earnings and revenue growth in 2024.

While the valuations of high-quality companies have risen since 2023, they remain below historical peaks. Metrics such as price-to-forward earnings and price-to-cash-flow are still favorable, and profitability, measured by ROE, is near a record high.

3 ETFs To Consider

As investors navigate through 2024, a strategic focus on high-quality U.S. equities thus becomes imperative. Here are 3 ETFs to consider:

1. A core multi-factor U.S. strategy can be used to take advantage. One that blends Quality, Value, and Minimum Volatility to capture a quality-centric upside with a defensive bias. State Street recommends the SPDR MSCI USA Strategic Factors ETF QUS.
2. The iShares MSCI USA Quality Factor ETF QUAL is another such ETF. QUAL provides exposure to large-cap U.S. stocks exhibiting positive fundamentals such as high return on equity, stable year-over-year earnings growth and low financial leverage.
3. The Invesco S&P 500 Quality ETF SPHQ is a third such ETF. The fund 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.

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