BlackRock iShares Aladdin Our company Investors Canada EN FR Sign In About us Products Investment themes Insights & education Resources Building resilience into ETF portfolios Quality stocks with strong fundamentals could benefit from prevailing economic trends. KEY TAKEAWAYS Economic growth in the U.S. has likely peaked, a trend with implications for all investors. Quality stocks have historically outperformed in mid-cycle economies when growth is positive but slowing. Recent U.S.-listed ETF flows demonstrate that investors are showing a preference for high-quality companies and assets. EYEING PEAK ECONOMIC GROWTH Now may be time for investors to consider the implications of slowing economic growth. While many COVID-era economic trends remain in place — shoppers are still buying more groceries online, many office workers continue to log in from home — we think that the biggest growth gains are behind us. Fiscal stimulus and easy monetary policy provided a bridge through the worst of the pandemic, helping ensure that an economic restart happened quickly. The U.S. recession that lasted from March to April 2020 was the shortest on record. But questions about vaccination progress and virus variants are tempering expectations. U.S. real GDP growth this year appears to have peaked at 6.7% in the second quarter, with Bloomberg consensus estimates showing a slide to 5.0% in the third, 5.1% in the fourth, and 4.2% in the first quarter of 2022.1 We don’t expect a contraction but investors should appreciate that, historically, shares of companies with strong fundamentals, often called “quality” companies (those with high return on equity, stable year-over-year earnings growth, and low financial leverage) have been beneficiaries in similar mid-cycle economic environments. Peaking growth Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of Sept. 13, 2021. OPPORTUNITIES FOR “BARBELL” APPROACH A major storyline in markets earlier in the recovery was the outperformance of cyclically oriented “value” stocks, especially smaller ones, which have historically benefitted during periods of higher economic growth. While lower-but-still-strong growth will continue to support value-oriented companies, we think that some of the early-cycle investment opportunities may have already played out, particularly in the U.S. Our teams have found that during periods of strong-but-declining growth, companies associated with quality fundamentals outperformed more cyclical, value stocks.2 To thread the needle between the two trends, we favor a “barbell” approach to stock investing — pairing value with quality to access companies that may be primed to perform in this mid-cycle environment. A strategic value-quality “barbell” approach to the stock market could offer better risk-adjusted returns and resilience to portfolios at this stage of the economic recovery, in our view. Additionally, we think quality-oriented companies have the pricing power to pass rising input costs through to customers and strong enough balance sheets to weather potentially thinner profit margins. FOLLOW THE FLOWS In the U.S., while value stock ETFs saw record-breaking inflows of $29 billion in Q1 and $20 billion in Q2, the pace slowed in Q3. Meanwhile, quality stock ETFs reversed a Q1 outflow of by bringing in $872 million in Q2 and $6.5 billion Q3 to date as investors sought the relative safety of quality names in the face of persistent inflation and signs of slowing growth. Flows also demonstrate a bias for quality bias among U.S.-listed bond ETFs: Flows into U.S. government bonds turned positive in Q2, adding $5.3 billion after Q1 outflows of $1.2 billion. A resurgence in Q2 corporate bond ETF inflows saw investment grade exposures take the lion’s share of assets, taking in nearly double those of high yield ETPs. And, In Q1, $8.5 billion flowed into inflation-protected fixed income ETFs setting a new quarterly record, only to be beat by Q2 flows of $9.6 billion.3 In the U.S., year-to-date flows show investors embracing “quality time” in portfolios year to date Source: BlackRock, Bloomberg, ETF groupings and categories determined by BlackRock, Markit. Chart by iShares Investment Strategy. Year-to-date 2021, as of Sept. 1. BOTTOM LINE The economic restart looks poised to slow in the U.S.. We believe that the current mid-cycle economic environment may be time for investors to consider U.S. quality stock ETFs for potentially added resilience. Index-based ETFs offer the potential for investors to add quality-oriented stocks in an affordable, diversified and tax-efficient manner. Gargi Pal Chaudhuri Head of iShares Investment Strategy Americas at BlackRock READ BIO Bob Hum, CAIA U.S. Head of Factor ETFs READ BIO Arjun R Kapur Investment Strategist Contributing author Priya Panse Factors Strategist Contributing author RELATED FUNDS EQUITY iShares MSCI USA Quality Factor Index ETF XQLT Explore more About us WHO WE ARE About BlackRock Corporate Sustainability Investment stewardship Our team OUR SOLUTIONS About iShares About Aladdin Financial Markets Advisory Products BY TYPE iShares ETFs Mutual Funds BY ASSET CLASS Equity Fixed Income Commodity Investment themes INVESTING APPROACHES Sustainable Investing The China opportunity Alternative investments Insights & education MARKET INSIGHTS Featured Insights BlackRock Investment Institute EDUCATION How ETFs trade What is an ETF How to buy ETFs Frequently asked questions (FAQs) Resources RESOURCES Resource Library Tax Information Center Customer service As a global investment manager and fiduciary to our clients, our purpose at BlackRock is to help everyone experience financial well-being. Since 1999, we've been a leading provider of financial technology, and our clients turn to us for the solutions they need when planning for their most important goals. CORPORATE Careers Newsroom Investor relations FAQs Contact us Accessibility LEGAL Terms & conditions Privacy policy Business continuity © 2021 BlackRock, Inc. All rights reserved. 1 BlackRock, Bloomberg, chart by iShares Investment Strategy. As of Sept. 1, 2021. 2 Analysis by iShares Investment Strategy team as of Sept. 1, 2021. BlackRock, Bloomberg, ETF groupings and categories determined by BlackRock, Markit. 3 Source: BlackRock, Bloomberg, ETF groupings and categories determined by BlackRock, Markit. As of Sept. 1, 2021. All figures are denominated in U.S. dollars unless otherwise noted. iShares® ETFs are managed by BlackRock Asset Management Canada Limited. Commissions, trailing commissions, management fees and expenses all may be associated with investing in iShares ETFs. 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