Value is clearly the story among investment factors this year, and while the rally in value stocks is still young – it’s just nine months old – investors may want to assess other factors as the economic recovery moves along.
That evaluation should include quality, a factor accessible with the Invesco S&P 500 Quality ETF (NYSEArca: SPHQ). Like the growth factor, quality is trailing value this year, but the $3.72 billion SPHQ is still up an admirable 11.84% year-to-date and resides near all-time highs on the back of a 3.10% gain for the month ending June 18.
Quality might actually be a value play at the moment because quality stocks are trading at discounts relative to historical norms. That’s something to consider because in a broad sense, the factor is usually richly valued. Indeed, SPHQ trades at 22.23x forward earnings, but its sports a stellar return on equity of 40.93%.
“Investors can typically expect to pay up for quality. But our research shows quality stocks have underperformed since vaccine announcements in November, sending their valuations lower,” according to BlackRock research. “Investors largely avoided or sold quality in favor of riskier bets that paid off in the early phases of the market upswing. This put higher-quality stocks at their largest discount to the broad market since the dot-com bubble of the early 2000s.”
Sizing Up SPHQ’s Outlook
SPHQ isn’t void of value stocks. Just over 22% of its 100 holdings fit that bill, but as noted above, the fund is lagging value counterparts this year. Some of that laggard status is attributable to SPHQ’s growth profile, as 37% of its components meet that designation.
However, if the economy moves from recovery to expansion, some mid-cycle exposure could prove rewarding.
“It may be time to pivot toward midcycle beneficiaries ― and chief among them are quality stocks,” adds BlackRock. “Our analysis of market cycles and stock performance by quality quintiles found that high quality has significantly outperformed in midcycle periods.”
SPHQ offers another benefit. It’s a credible way for investors to position for a recovery in tech stocks without taking on significant risk. Tech is by far SPHQ’s largest sector exposure at 41.41%, according to Invesco data. SPHQ’s tech components fit the quality bill as NVIDIA (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), and Apple (NASDAQ: AAPL) combine for more than 16% of the ETF’s weight.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
