Managing risk and capturing growth potential: Why invest in JQUA
The economic ripple effects of COVID-19 are hitting some companies harder than others. As the trend continues, passively buying broad benchmarks may expose investors to unstable companies and unwanted risks. Instead, investors may want to consider a strategy that targets the highest quality businesses with high profit margins and low debt levels. The JPMorgan U.S. Quality Factor ETF (JQUA) seeks to own the highest quality stocks in each sector, which can help investors to weather market downturns and also participate in upswings.
Why it’s high time for high quality
Lockdown efforts aimed at mitigating the virus will likely trigger a severe economic slowdown and, in turn, an earnings recession for U.S. corporations. Profits were slowing even before the pandemic, and forecasts have worsened since. The latest earnings estimates range from steep declines in more sensitive sectors like energy and industrials, to modest growth in more insulated industries such as technology and utilities.
Meanwhile, corporate leverage has climbed to its highest level in years, raising solvency concerns among the more financially vulnerable holdings in traditional indexes. Against this backdrop, JQUA’s focus on higher-quality, stable companies offers a solution for staying invested through the uncertainties. JQUA seeks to:
Manage risk and limit losses during volatile periods. Quality was one of the few equity styles to post positive excess returns as stocks sold off sharply in the first quarter. Relative performance was especially strong in March, as investors gravitated toward the types of large, high-quality businesses we favor.
Capture growth potential as markets recover. Quality stocks have historically outperformed the broad market across cycles, with less risk. Adding exposures now allows investors to access growth opportunities as they arise and enhance long-term return potential as we move through and beyond the pandemic.
Chart 1: Higher returns with lower risk: U.S. Quality factor ETF vs. Russell 1000 Index