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Keeping Quality, Ditching Junk A Good Idea Into Year-End

U.S. equity markets experienced one of the swiftest bear markets in history earlier this year and one of the most rapid rebounds on record. However, with Election Day looming, there are plenty of reasons why investors may want to dial back on risk.

Benzinga · 08/18/2020 17:29

U.S. equity markets experienced one of the swiftest bear markets in history earlier this year and one of the most rapid rebounds on record. However, with Election Day looming, there are plenty of reasons why investors may want to dial back on risk.

What Happened

That objective can be accomplished while maintaining long equity exposure with select exchange-traded funds, including the Direxion S&P 500 High minus Low Quality ETF (NYSE:QMJ).

QMJ, which debuted in February, tracks the S&P 500 150/50 Quality 0.30% Decrement Index.

QMJ “aims to deliver a more complete solution to gaining exposure to the quality factor. By extending the scope of quality scores across the U.S. large cap universe to both high and low quality companies, the ETF seeks to deliver a robust profile of quality exposure,” according to the issuer.

Why It's Important

QMJ is up almost 4% over the past month, an impressive when considering the resurgence in riskier assets. The move is even more impressive when factoring in that Amazon (NASDAQ:QMJ) is one of the short positions in the fund. Still, the fund's “add quality, ditch junk” mission is worth acknowledging as uncertainty lingers.

“The backdrop of supportive fiscal and monetary policy has been, and should continue to be, good for risk assets, and there continues to be positive developments regarding COVID-19 around the world,” said Direxion in a recent note. “Investors may be best served, however, maintaining a strong balance of participation and protection. As we have seen in months prior, this recovery is proving to be unlike others past, and the playbook going forward will likely evolve as winners and losers continue to emerge.”

In delivering quality exposure, QMJ focuses on return on equity, accruals, and financial leverage. With that, its 150% long positions include a combined weight of over 80% to the technology and healthcare sectors.

What's Next

QMJ's technology exposure is meaningful on two fronts. Assuming Joe Biden wins the White House, a softer tone toward China is likely, which reduces some of the political risk for tech stocks. Second, the sector's earnings outlook is among the best of the 11 GICS sectors.

“From an earnings perspective, we anticipate that the Technology sector and underlying industries such as internet, software, and semiconductors will provide the most upside risk for investors,” according to Direxion. “While forward guidance will be key here, the overweight in technology within the cyclicals basket gives us some confidence that this trend can continue.”