There are times when growth stocks are in style, and there are times when value is in style, but quality is always fashionable, and it’s accessible with an array of exchange traded funds.
That includes the WisdomTree US Quality Dividend Growth Fund (DGRW). DGRW, which tracks the WisdomTree U.S. Quality Dividend Growth Index, is a solid though not spectacular performer this year. Against the backdrops of rising dividends and investors putting more emphasis on quality, the WisdomTree ETF could be poised to stand out in 2022.
In addition to payout growth, another factor DGRW has on its side is the consistency and durability of the quality factor.
“Of course, no factor strategy is perfect and outperforms every day and in all market environments. Quality stands out among all factors because its periods of underperformance are relatively easy to identify and because this underperformance tends to remain pretty contained. Most factors can post double-digit underperformance in a short period of time, which has been less the case historically for quality,” writes Pierre Debru, head of quantitative research and multi-asset solutions at WisdomTree Europe.
With the Federal Reserve poised to scale back and ultimately end its bond buying and potentially raise interest rates multiple times next year, the time could be ideal to revisit the quality factor and DGRW.
“Such mid-cycle behaviors tend to favor high-quality stocks (high profitability, low debt). After a period when they took a back seat to their lower-quality counterparts, such stocks may now benefit from their high pricing power and stronger balance sheets to help them face rising costs and compressing margins and outperform,” adds Debru.
Another reason the current environment is conducive to quality stocks is the evolution of the economic cycle, With most economists forecasting slower GDP growth next year, it’s becoming clear that the recovery phase of the coronavirus recession is ending.
As economic recoveries move on to expansion and as growth slows, market participants often favor ditching junkier equities that led in the post-recession rally, and when they do that, they embrace quality, which can be durable in slower growth environments.
“The latest two years fit that pattern to a T. Quality performed very strongly at the end of the previous cycle, i.e., in 2019 and in the early part of the COVID-19 crisis in early 2020,” concludes Debru. “Since the election of President Biden and the rollout of the vaccine, the low-quality rally has kicked into gear, and high-quality stocks have taken a bit of a back seat to the rest of the market. However, as we approach the first anniversary of the Biden presidency, and with the Fed starting to taper and hinting at a more hawkish stand, it appears that the early recovery phase may be ending, especially in the U.S.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.