The Best Quality-Focused ETF to Invest $2,000 In Right Now

The stock market looks wobbly these days. Sudden growth spurts are often followed by quick price cuts, and vice versa. Consumer confidence is running low, and the bull market that started in October 2022 might be running out of rocket fuel. How much higher can the artificial intelligence (AI) boom lift the major market indexes?

I'm not saying that Wall Street is about to fall off a cliff. Nobody knows exactly what's next, and the stock market tends to rise in the long run despite speed bumps and potholes along the way. But if you're looking for a place to invest $2,000 (or any reasonable amount, really) in this market, I would recommend an exchange-traded fund (ETF) that invests in high-quality businesses.

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Image source: Getty Images.

Are the simplest ETFs always the best?

This criterion applies to any of the leading index funds. The S&P 500 (SNPINDEX: ^GSPC) index is a hand-picked list of roughly 500 American stocks that pairs large market caps with solid financials. The Dow Jones Industrial Average (DJINDICES: ^DJI) whittles that list down to 30 business giants outside the transportation and utility sectors, at the discretion of an expert panel. Hence, you could argue that index funds like the Vanguard S&P 500 ETF (NYSEMKT: VOO) or SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA) would be good investments in a jittery economy.

That's absolutely correct, of course. You can't really go wrong with these legendary funds in the long run. But you should look at a different strategy if you think the top indexes are too dependent on a small number of high-performing stocks. In particular, the S&P 500 is leaning deeply into the tech sector nowadays. 8 of the top 10 S&P 500 holdings are tech giants with a finger in the AI pie. 60% of the Dow's value springs from technology, financial, and healthcare stocks.

Let me introduce you to the iShares MSCI USA Quality Factor ETF (NYSEMKT: QUAL). It's a large fund with a robust return history that might just be the perfect investment in an uncertain market.

This unsung ETF could be your portfolio's new best friend

This is not a new concept. The Quality Factor ETF has been around since 2013 and has a massive $50 billion of assets under management. It's also a passive index tracker with an expense ratio of just 0.15%. Still, it's nowhere near as popular as the Dow and S&P 500 trackers.

This passive index fund mirrors the performance of the MSCI USA Sector Neutral Quality Index. In turn, the index reflects the market performance of large and mid-cap American stocks that meet certain quality requirements. Each stock gets a "quality factor" grade, based on three variables:

• Return on equity, which measures the company's ability to turn a profit from its assets
• Debt to equity, tracking the balance between financial debt and shareholder investments
• Earnings variability, with a higher score to more predictable earnings results

The perfect company under this system would have a high return on equity, low debt to equity, and very stable bottom-line profits. That's the core idea you're investing in here.

The quality score is multiplied by the stock's market cap, and the resulting value becomes the basis for weighting the index. There's a 5% cap to maximize the impact of any single stock. The index is rebalanced to capture fresh scores and reset the caps twice a year.

The latest update took place on January 31. Most of the top 10 constituents are shared with the Dow and S&P 500 market trackers, but there are some significant differences. For example, the Quality Factor ETF holds smaller batches of e-commerce giant Amazon (NASDAQ: AMZN) or electric car veteran Tesla (NASDAQ: TSLA) than the other funds. On the other hand, it brings a heaping helping of discount-store operator TJX Companies (NYSE: TJX) and credit card processor Visa (NYSE: V).

Performance so solid, it's easy to miss

The Quality Factor ETF is also a solid performer. I mean, you can barely tell its chart apart from an S&P 500 index fund in the long run. Their total returns have been nearly identical since this ETF was introduced:

QUAL Total Return Level data by YCharts

It may seem pointless to pick this fund over the Vanguard S&P 500 ETF, since they have such a long history of comparable performance. But I'd like to point out a couple of things here.

• The likeness to a robust S&P 500 ETF is a solid mark of quality, if nothing else. If all a fund does is match the leading market indicator for more than a decade, it's doing something right -- and building significant wealth for its shareholders.
• Past performance is not a guarantee of future results. That's especially true in times of volatility and market uncertainty. Whittling down the S&P 500's portfolio to about 120 of the most financially stable names on that list could be the right idea, just in case the market takes a turn for the worse.

Again, there's nothing wrong with keeping things simple and sticking to a tried and true performer like the leading S&P 500 index funds. But this could be the right time to prefer a firmly quality-focused portfolio instead. If you have $2,000 if investable cash to spare, you should consider picking up 11 shares of the iShares MSCI USA Quality Factor ETF.

The name may not roll off your tongue, but it's a rock-solid investment for uncertain times.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet, Amazon, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, TJX Companies, Tesla, Vanguard S&P 500 ETF, and Visa. The Motley Fool has a disclosure policy.