The S&P 500 is one of the world’s most widely followed equity benchmarks. As such, there are plenty of exchange traded funds offering standard and more unique plays on the benchmark U.S. equity index.
One notable alternative to the traditional S&P 500 index fund is the PowerShares S&P 500 High Quality Portfolio (NYSEArca: SPHQ), an exchange traded fund that emphasizes quality in its approach to S&P 500 stocks.
Currently, SPHQ tracks the S&P 500 High Quality Rankings Index, which “is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company’s earnings and dividends,” according to PowerShares.
In March, SPHQ will transition to the S&P 500 Quality Index. While the quality and value factors often appear together across various stocks and ETFs, that should not be interpreted to mean that all quality stocks and ETFs are discounted relative to the broader market. During periods of elevated market volatility, the quality factor has historically posted better returns relative to other investment factors.
SPHQ “has a five-year upside capture ratio of 93.67% vs. 95.12% for the large-blend category, which means it slightly lagged in up markets. However, it has a five-year downside capture ratio of 78.31% vs. 96.80% for the large-blend category, which indicates that it far outpaced most peers during market declines,” reports Investor’s Business Daily.
SPHQ’s application of the quality factor is evident in its sector allocations. For example, materials and energy, recently two of the worst-performing sectors, combine for just over 9% of the ETF’s weight. Conversely, the ETF allocates a combined 45.7% of its weight to industrial and consumer discretionary names.
Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar. However, as the bull matures, investors often exhibit a preference for higher quality fare with more compelling valuations. [Very Valuable Value ETFs]
SPHQ’s “record of strong upside potential, plus downside protection, makes it a solid choice for long-term successful investing. SPHQ produced an annual average 2.7%, 14.6% and 13.5% gain over the over the past one, three and five years as of Jan. 5, respectively,” adds IBD.
PowerShares S&P 500 High Quality Portfolio
