3 ETFs Quietly Outperforming the Market

Daniel Sotiroff: Juggernaut growth stocks like Nvidia have captured attention and headlines over the past year, as they’re largely responsible for the market’s incredible climb. As a result, many of this year’s best-performing ETFs are growth-oriented and often land in the US large-growth category.

But there are some exceptions. And some of these exceptions follow great processes that should endure over the long run.

3 ETFs Quietly Outperforming the Market

1. iShares MSCI USA Quality Factor ETF QUAL
2. Invesco S&P 500 Quality ETF SPHQ
3. iShares MSCI International Momentum ETF IMTM

The first outlier is Silver-rated iShares MSCI USA Quality Factor ETF, commonly known by its ticker QUAL, or QUAL, for short. It holds some of the largest and most profitable stocks in the US market. Recent top-performing names like Nvidia, Eli Lilly, and Meta Platforms are among its 10 largest holdings.

But QUAL isn’t really a growth portfolio. It lands in the large-blend category and has a far more diverse portfolio than those recent all-stars. It also holds shares in companies with more-timid valuations, such as ConocoPhillips, Nike, and Johnson & Johnson. None were really strong performers over the first eight months of 2024. But despite their lackluster performance, they’re in far better financial shape than many others in the market.

A close cousin to QUAL is Silver-rated Invesco S&P 500 Quality ETF, which trades under the ticker SPHQ. Like QUAL, it lands in the large-blend category and aims to provide exposure to stocks with relatively stronger fundamentals.

SPHQ turns over its holdings a little more frequently than QUAL, so stocks will enter and exit quicker as their fundamentals change. For example, SPHQ had a sizable stake in Nvidia stock early this year, which grew to around 11% of its portfolio by midyear. But SPHQ subsequently sold all of its shares in the chipmaker at the end of June, as other stocks had more-attractive fundamentals. Other top performers like Netflix, Costco, and Broadcom all held prominent positions in this portfolio in mid-September.

The final ETF for today is somewhat of a dark horse. Bronze-rated iShares MSCI International Momentum ETF, ticker IMTM, is among a rare subset of foreign-stock ETFs that have managed to outperform the US market this year. Its margin of victory wasn’t huge. Its total return beat Vanguard Total Stock Market ETF by about 1.2 percentage points over the first eight months of the year. But any foreign stock ETF that can pull off that feat in 2024 is noteworthy.

Foreign markets have been relatively stable this year, and that bodes well for this ETF. In that environment, yesterday’s winners typically continue performing well. Seven of IMTM’s top 10 holdings returned more than 20% through August. And several of the large Japanese stocks that it holds returned more than 50% over those eight months.

But there is a downside. Momentum ETFs are subject to violent whipsaws when volatility picks up. It should still perform well over the long-run, but this isn’t an ETF for the faint of heart.

Watch 3 Great International Value ETFs for more from Daniel Sotiroff.