2 ETFs To Improve The Overall Quality Of Your Portfolio

David Dierking

The coronavirus has reset investor risk expectations from the "all risk is good risk" fun times of the past few years to an environment where balance sheet health and financial viability are scrutinized more closely.

For a while, risk premiums shot through the roof, especially in junk bonds, and that sent asset prices through the floor quickly. The riskier asset classes - small-caps, high beta, high yield, leveraged loans - all underperformed.

March's bear market emphasized the notion that quality is just as important in a portfolio. That's especially important in today's market where volatility remains at historically elevated levels and there's no clear indication whether the coronavirus outbreak might be on the downswing or it might last through the latter half of 2020.

If you're looking to position your portfolio more defensively, there's a few ways to do it. You can target value stocks, dividend payers or companies that generate strong cash flows. These are the kinds of companies that are more well-established and better positioned to weather any downturns.

If you're considering adding a little more quality to your portfolio, take a look at one of these two stellar ETFs.

Pacer U.S. Cash Cows 100 ETF (COWZ)

In rough times, it's always a good idea to stick with companies that generate a lot of cash. Studies have shown that over time there's a direction correlation between how much excess cash a company generates with how well its stock performs. These are the companies best able to ride out any economic downturns and come out stronger on the other side.

That's exactly what COWZ tries to do. It starts with the Russell 1000 and targets the 100 companies with the highest free cash flow yields (FCF being essentially all the money that is left over after it pays all the bills and reinvests in the business) with the highest free cash flow yields getting greater weighting in the final portfolio.

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The extra liquidity does a few things for these companies. They tend to have lower debt ratios and cleaner balance sheets overall. They have greater flexibility to take advantage of strategic opportunities. And, if all else fails, they have the means to increase dividend payments to shareholders.

As it stands currently, COWZ trades at a P/E ratio of just 8 and offers a 3.5% dividend yield.

WisdomTree U.S. Quality Dividend Growth ETF (DGRW)

In this market, everyone is searching for a good dividend yield, but not any yield will do. Dividend growth and dividend quality strategies have been outperforming the riskier high yield subsector for several months, so why not add an ETF that brings the best of both of these strategies?

DGRW starts with a large-cap dividend-paying stock universe including only those whose earnings yields exceed their dividend yields in order to add a sustainability aspect to the portfolio. From there, the fund looks for the best combination of long-term earnings growth, return on equity and return on assets. Companies that rank in the top 300 by this combined ranking will be selected for inclusion.

Like COWZ, DGRW offers a portfolio of companies with healthy balance sheets, lower overall risk profiles and a yield that exceeds the major market averages. Since its inception in 2013, DGRW has outperformed the S&P 500 and currently pays a 2.6% yield.

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