Stock Analysis & Ideas

5 Best-in-Class ETFs for a Market Recovery

Story Highlights

ETFs are surging amid a potential market recovery. Consider these five high-conviction vehicles to bolster your portfolio.

Exchange-traded funds (ETFs) experienced significant inflows during November amid a broad-based stock market recovery. In fact, last week, the S&P 500 (SPX) ended above its 200-day moving average for the first time in seven months, indicating a potential shift in investor sentiment. I screened through TipRanks’ database and identified five “best-in-class” ETFs that I’m bullish on. They are Invesco QQQ Trust (QQQ), iShares Russell 2000 ETF (IWM), Schwab U.S. Dividend Equity ETF (SCHD), Invesco S&P 500 Equal Weight ETF (RSP), and iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

Evidence suggests that inflation has stabilized, which could result in a more conducive interest rate environment and a reignited stock market. However, diversification is of the utmost importance when the market is on a knife’s edge. Thus, considering ETFs might be an optimal way to approach a potential market recovery.

Let’s disentangle each ETF.

Invesco QQQ Trust (QQQ)

Invesco’s QQQ Trust ETF aims to replicate the Nasdaq-100 Index by leveraging statistical techniques. The advantage of investing in the ETF instead of the index itself relates to cost and affordability. The ETF trades at less than $290 per share at an expense ratio of merely 0.20%, meaning it’s easily investable.

The ETF provides compelling exposure to high-growth technology stocks, namely Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA). Moreover, its high-beta characteristics allow investors to take-on excess risk while investing in high-quality companies. Thus, aligning one’s portfolio with optimal risk-adjusted returns.

QQQ hosts a return on equity worth 46.45%, illustrating the quality of the ETF’s underlying securities. Adding to the bargain, it distributes a dividend yield worth approximately 0.71%, which is anticipated to grow in the coming years.

iShares Russell 2000 ETF (IWM)

Small-cap stocks could outperform the market in 2023 in the event that interest rates stabilize. Therefore, BlackRock’s (BLK) iShares Russell 2000 ETF might be a firm favorite among Wall Street’s elite investors.

The ETF provides exposure to stocks like Matador Resources (MTDR), Texas Roadhouse (TXRH), RBC Bearings (RBC), and Shockwave Medical (SWAV). Approximately 30% of the vehicle is invested in financial and industrial assets, meaning it possesses cyclical properties. However, with no risk comes little reward.

In isolation, the ETF is undervalued, with a price-to-book ratio worth 1.93x and a price-to-earnings ratio of 13.3x. On top of that, the fund has an expense ratio that is 57.78% lower than its sector peers.

Schwab U.S. Dividend Equity ETF (SCHD)

Dividend ETFs usually outperform the broader market whenever recession risk is high due to investors’ tendency to seek ‘readily available’ income in risk-off market environments. Therefore, Charles Schwab’s (SCHW) Schwab Dividend Equity ETF is the ideal option for those who want to stay invested but remain uncertain about the market’s near-term prospects.

The ETF provides access to names such as IBM (IBM), Pepsi (PEP), Cisco (CSCO), Pfizer (PFE), and The Home Depot (HD). The ETF’s composition is defensive-minded, as its exposure predominantly includes counter-cyclical stocks with low betas. However, an abundance of data suggests the fund can provide substantial returns, as it has outperformed the market since its inception.

It’s all sunshine and rainbows from a valuation perspective, as the ETF supports a price-to-earnings ratio of only 13.4x, which is considered low for an ETF filled with “best-in-class” stocks. In addition, the fund distributes lucrative dividends, yielding approximately 3.36%.

Invesco S&P 500 Equal Weight ETF (RSP)

The S&P 500’s market capitalization-weighted approach is only favorable to some, as many investors seek exposure to ‘back of the line’ assets within the index. Invesco’s S&P 500 Equal Weight ETF solves the problem by weighting its holdings equally, therefore removing large-cap biases.

Generally speaking, you’d have to be bullish on the broad-based market before considering this ETF, as it samples some of the most prominent assets within the publicly-traded equity sphere. Interestingly, the fund is invested in underfollowed names such as Biogen (BIIB), Phillips 66 (PSX), Dexcom (DXCM), and Arch Capital Group (ACGL).

The fund hosts a respectable price-to-earnings ratio of 14.7x and a moderate price-to-book ratio of 2.91x. Moreover, RSP’s dividend yield of 1.69% adds to its total-return prospects.

iShares iBoxx USD High Yield Corporate Bond ETF (HYG)

Investing needs to be done with a passion for success to be achieved, and nothing says passion more than seeking overlooked tactical plays such as niche corporate bond ETFs.

BlackRock’s iShares iBoxx USD High Yield Corporate Bond ETF provides investors with exposure to short and medium-duration corporate bonds with significant total-return properties. The ETF generates returns by looking for optimal risk-adjusted corporate debt categories and sorts its portfolio according to the yield curve. Approximately 54% of the ETF is invested in BB-rated bonds, which are known for producing sublime high-yield returns.

The ETF exhibits a dividend yield of roughly 5.1% and has an annualized volatility of 12.35%, making it a brilliant risk-reward investment.

Concluding Thoughts: ETF Momentum May Continue

Exchange-traded funds have been experiencing serious inflows amid a possible stock market recovery. The ETFs mentioned in the article were among November’s primary breadwinners, and the signs are that their momentum might continue.

Disclosure

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