Deep Dive on Quality Warranted Today

It hasn’t been the smoothest of rides for domestic equities in the first quarter as highlighted by a year-to-date loss for the S&P 500 of 4.69% and a gain over the past month of 5.69%.

That’s not to say volatility is reaching excessive levels, but those data points underscore the notion that the current landscape for stocks, what with high inflation and geopolitical conflict, among other factors, is far from sanguine.

Not surprisingly, some market participants are turning to low volatility strategies this year and they’re being rewarded for that move. For example, the S&P 500 Low Volatility Index is beating its traditional counterpart by more than 220 basis points year-to-date. That’s a solid showing, particularly when accounting for the low volatility gauge’s exposure to some sectors that are often negatively correlated to rising interest rates.

Fortunately, advisors don’t have to rely solely on minimum volatility strategies to get clients through this topsy turvy market.

Quality Considerations

I’ve frequently mentioned the concept of quality stocks in this space and today’s market environment makes now an ideal time to revisit that idea. As I’ve previously noted, defining quality isn’t as easy as the other marquee investment factors, but it has some hallmarks, one of which is dividends.

“WisdomTree’s Quality Dividend Growth family (WisdomTree Quality) starts with a more refined universe of large- and mid-cap companies paying regular cash dividends,” says WisdomTree analyst Matt Wagner. “Why dividends? A consistent dividend payment is a signal of corporate health and cash management discipline that aligns with the goal of building a quality portfolio.”

Advisors should expect dividends to be in the spotlight again this year with payout growth providing some optimism for broader market performance and a buffer against high inflation.

Bank of America Global Research suggests dividends could account for the bulk of clients' total equity market returns in 2022 and S&P 500 payout growth could be as high 13%. In its own right, that's an impressive statistic – assuming it proves accurate. It's even more impressive when considering last year's pace of dividend growth and that that growth is essential in keeping clients on top of inflation.

As for quality, the proof is in the pudding in terms of the protection it offers to clients.

“So far in 2022, the S&P 500 Index is down over 5%, bouncing off its lows in recent weeks. The WisdomTree Quality and S&P Quality indexes have provided over 150 basis points (bps) and 50bps of downside protection, respectively, relative to the S&P 500,” adds Wagner.

Quality = Lower Volatility

Quality and low volatility are two distinct factors, but the former often sports traits of the latter and that’s a good thing for clients.

WisdomTree takes that concept up a notch. Over the trailing three- and five-year periods, the beta on the WisdomTree U.S. Quality Dividend Growth Index is significantly lower than that of the MSCI USA Sector Neutral Quality Index.

“There are several ways to tap into quality companies. WisdomTree’s approach to targeting a universe of dividend payers gives it an over-weight allocation to Consumer Staples and an under-weight allocation to Information Technology, an attractive combination in a volatile year when high-growth tech stocks have lagged steady dividend payers,” concludes Wagner. “We think the WisdomTree Quality approach provides a compelling option for investors that may be aiming to lower their equity beta and hedge the multitude of risks—geopolitical, Fed rate hikes, inflation, COVID-19—that market participants currently face.”

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