In this piece, we will take a look at the ten best quant exchange traded funds. If you want to skip our introduction to quantitative investing and the stock market in general, then skip ahead to 5 Best Quant ETFs.
As the third quarter of 2023 is about to end, the stock market is shifting its focus from interest rate hikes to interest rate drops. Most of investor attention over the past year and a half remained on the Federal Reserve, as the central bank aggressively raised interest rates to curtail inflation. Inflation in America had jumped over 9% last year, shocking lawmakers and spurring the central bank into action to restrict monetary supply and economic growth to sap demand for products and bring down prices.
Looking at the latest data set in September, this approach appears to be bearing fruit. The Labor Department's Consumer Price Index (CPI) data for August shows that inflation is on a persistent downward trend in America. According to the details, prices in America rose by 0.6% over July, for a slightly accelerated reading over the previous month's 0.2%. On an annual basis, this translates into a 3.7% price rise in August, which again was higher than July's reading of 3.2%.
On the surface, this would show that inflation is rising and the Fed has to increase interest rates even more. However, digging deeper into the data shows that the opposite just might be true. This is because core inflation, which measures the cost of items apart from food and energy prices, stood at 4.3% in August to mark another sizeable drop of 0.4% over July's figures. The core reading is the Federal Reserve's preferred inflation metric since it removes the volatile impact of the food and energy markets, which are often influenced by global factors. And if you follow Insider Monkey regularly, you'd know that oil prices are on the rise again after Saudi Arabia led a production cut that pushed crude oil rates to ten month high levels.
So, since the core inflation has dropped, the Federal Reserve has little incentive to keep the pedal on the metal as they say when it comes to interest rate hikes. Market reaction to the latest data set also reflects this, as while major stock indexes did not post significant gains after the latest inflation data in the U.S. for August 2023, they didn't drop either. As trading on the day of the data release closed, the S&P500 index had gained 5.5 points, and the NASDAQ 100 and Dow Jones Industrial Average (DJIA) were up by 58 points and down by 70 points, respectively.
The next natural question to ask is why didn't the market move more favorably to a data reading that provides strong evidence that the Federal Reserve's favorite inflation reading is dropping. Well, the first thing to consider is the impact of energy prices on the broader market. Gasoline prices were up by 10% in August over July's figures and fuel oil jumped by 9.1%. These prices tend to translate into higher inflation for other consumer goods since they are tied directly to logistics and shipping costs. So, the logic is that since energy prices are up, they might lead to inflation for other goods also increasing in the future and make the Fed's inflation fighting more complicated.
The second reason why markets remained muted is that all minds are now focused on determining when the central bank will start to reduce interest rates. As evidence, consider interest rate hiking probabilities reported by the CME FedWatch Tool. It shows that 97% of watchers believe that the Federal Reserve will leave interest rates unchanged at its upcoming meeting in September, with only 3% believing that another 25 basis point hike might come into play. However, the resounding belief of an interest rate pause doesn't extend when we look at the probabilities for rate hikes in November and December. For the November meeting, markets have penned in a 39% chance for a 25 basis point hike, and for the December moot, odds of rates going up by 0.25% sit at 40.3%.
The latest data set, which saw inflation come higher than originally anticipated can induce more uncertainty in the energy component of inflation and provide "impetus" to the Fed to raise interest rates in November according to F.L.Putnam chief market strategist Ellen Hazen who shared her thoughts about what effects this would lead for the stock market in a chat with Yahoo Finance after the inflation reading:
We've already seen such a strong market, year to date with the S&P and even though some other areas have lagged like small and mid cap, those are still up nicely year to date. So I think from here going forward the path becomes a little narrower for the Fed to achieve that soft landing that they've been trying to get. Because they're gonna have to be higher than longer and it maybe that they need to even increase beyond November, we don't know. But, given the returns that we've seen year to date, we wouldn't be surprised to see an exhale of the market in any of the areas of the U.S. market, large, mid, or small. I do think that if they can pull off the soft landing, then we're going to get a broadening of the market. Just like we saw in June, in July, but which ended up going backward in August, in September. If they can achieve the soft landing, then the concentration of the market in this big seven tech stocks is going to reverse because if growth is not scarce, and we achieve this soft landing and we're not gonna hit into some kind of recession, then you could see some of those other areas that are much cheaper to do well. On the other hand, if they are not able to pull off the soft landing, then we're gonna see the market continue to be concentrated.
With this context of the current stock market environment, one way to play the market is through a quantitative approach. This involves sifting through large amounts of historical and mathematical data to make trading decisions, and some of the largest hedge funds and institutional investors in the world employ powerful software to do so. Today we'll look at some top performing quantitative exchange traded funds, out of which the top picks are ALPS O'Shares U.S. Quality Dividend ETF Shares (BATS:OUSA), Cambria Shareholder Yield ETF (BATS:SYLD), and iShares U.S. Equity Factor ETF (NYSE:LRGF).
10. Alpha Architect U.S. Quantitative Value ETF (BATS:QVAL)
Our Methodology
To compile our list of the best quant ETFs, we first made a list of the 25 largest quantitative ETFs in terms of market capitalization. Then, their trailing five year daily total returns were determined and the top ten quantitative ETFs are as follows.
10 Best Quant ETFs
10. Alpha Architect U.S. Quantitative Value ETF (BATS:QVAL)
5 Year Return: 5.59%
Alpha Architect U.S. Quantitative Value ETF (BATS:QVAL) is part of the Alpha Architect fund family. The fund was set up in 2014 and it has net assets that are worth $277 million. More than half of its holdings are in the energy sector, and the largest holdings are in CONSOL Energy Inc. (NYSE:CEIX) and CNX Resources Corporation (NYSE:CNX). Along with Cambria Shareholder Yield ETF (BATS:SYLD), ALPS O'Shares U.S. Quality Dividend ETF Shares (BATS:OUSA), and iShares U.S. Equity Factor ETF (NYSE:LRGF), it is a top quant ETF based on five year returns.
JPMorgan Market Expansion Enhanced Equity ETF (NYSE:JMEE) is a small exchange traded fund with $887 million in net assets. Despite this, it is one of the oldest funds on our list, since it was set up in 1998. More than 98% of its holdings are invested in stocks, and one fifth of the fund is invested in the industrial segment. The JPMorgan Market Expansion Enhanced Equity ETF (NYSE:JMEE)'s top three company stock investments are in Builders FirstSource, Inc. (NYSE:BLDR), Jabil Inc. (NYSE:JBL), and Reliance Steel & Aluminum Co. (NYSE:RS).
8. Hartford Multifactor US Equity ETF (NYSE:ROUS)
5 Year Return: 6.68%
The Hartford Multifactor US Equity ETF (NYSE:ROUS) is part of the Hartford Mutual Funds fund family. It has net assets worth $429 million and was set up in 2019. The fund focuses on investing in large cap value stocks and its average price to earnings ratio is just 0.06. The fund aims to primarily reduce the volatility in investing, as it seeks to shorten the volatility that its stocks might face when compared to the broader market.
7. IQ U.S. Large Cap ETF (NASDAQ:CLRG)
5 Year Return: 6.76%
IQ U.S. Large Cap ETF (NASDAQ:CLRG) is part of the IndexIQ funds family and had $256 million in net assets. The fund limits itself to target companies that are part of the quant heavy NASDAQ Chaikin Power U.S. Large Cap Index. More than 21% of the fund is invested in the technology industry, while financial services, industrial, and healthcare also represent large portions of the shareholdings. Some top stocks are Broadcom Inc. (NASDAQ:AVGO) and Eaton Corporation plc (NYSE:ETN).
6. Vanguard U.S. Multifactor ETF (BATS:VFMF)
5 Year Return: 6.89%
Vanguard U.S. Multifactor ETF (BATS:VFMF) has $173 million in net assets and was set up in 2018. It invests primarily in mid cap value stocks, and as a whole, the fund focuses on investing in companies with strong momentum, volatility, and other indicators. Consumer cyclical stocks are the top picks, and the Vanguard U.S. Multifactor ETF (BATS:VFMF) has also spread its portfolio in energy, industrials, financial services, and technology sectors.
ALPS O'Shares U.S. Quality Dividend ETF Shares (BATS:OUSA), Vanguard U.S. Multifactor ETF (BATS:VFMF), Cambria Shareholder Yield ETF (BATS:SYLD), and iShares U.S. Equity Factor ETF (NYSE:LRGF) are some top quant ETFs.
