Note: This is just one in a series of articles talking about my top picks for 2020. I encourage you to check out my other top picks under the "Trade Ideas" tab and look for the "Top ETF Picks For 2020" heading!
In case you haven’t noticed by reading some of my other top picks for this year, I’m taking a decidedly defensive approach to 2020. By no means am I suggesting that investors should be selling off their equity positions in the new year, but I think principal protection and preservation should be a theme for most investors.
QDEF is one of my favorite ETFs. The fund’s index scours the universe of dividend-paying stocks by looking at factors, such as profitability, cash flow and management efficiency, to assign an overall dividend quality score to each. Those with the lowest scores are eliminated and all remaining qualifying stocks are then optimized into a high quality, high yield portfolio that has a beta between 0.5 and 1.0.
The fund tilts very heavily towards large-caps, but includes many of the most durable, financially healthy companies in the world.
The final product ends up displaying a lot of the characteristics of a low volatility, value-oriented portfolio - ideal if the economy and the markets turn sideways - while the high yield is an added bonus. The yield premium on QDEF has historically been in the 0.75-1.00% range, which is where it is right now - 2.65% for QDEF vs. 1.68% for the S&P 500.
Yes, I know that both dividend and value investing have been out of favor for some time. But the bigger picture tells me about a market that's been over-inflated by billions of dollars from the Fed as well as an economy that is slowing noticeably.
The Fed may yet be able to engineer a soft landing and subsequent rebound, but there's plenty of evidence to suggest that investors should at least consider taking some risk off the table. The trade war, the standoff in Iran and the continued contraction within the manufacturing space are all issues that could affect the ability of growth stocks to maintain leadership in the coming year.
QDEF is a good way to maintain U.S. large-cap exposure, still the preferred asset class of many investors, while providing a downside buffer.
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