Among investment factors, the growth/value debate played out again in 2021. That’s likely to be the case again in 2022.
Growth and value usually command the bulk of factor-related headlines, but investors shouldn’t sleep on the quality factor. Baskets of quality stocks are accessible via an array of exchange traded funds, such as the Invesco S&P 500 Quality ETF (NYSEArca: SPHQ).
While so many investors are focusing on growth and value, SPHQ is up 26% year-to-date. That’s a slight advantage over the S&P 500 and a significant advantage over the S&P 500 Value Index. Add to that, the time could be right to consider quality and SPHQ as 2022 ideas.
“One aspect to consider is quality. The actual stocks can be either value or growth and in any sector, but they should have competitive businesses that ensure stable earnings growth, no matter what the economy is doing. Quality stocks also often have strong balance sheets with minimal debt so when the Federal Reserve raises interest rates, they will be less affected by the higher rates,” reports Jacob Sonenshine for Barron’s.
The $3.47 billion SPHQ follows the S&P 500 Quality Index, which is rooted in return on equity, accruals ratio, and financial leverage ratio. The Invesco fund is home to 99 stocks, significantly fewer than reside in the standard S&P 500, indicating that quality is often an exclusive designation.
With the growth/value debate poised to rage on next year, SPHQ could be appealing for investors who don’t want to decide between those factors.
“On the one hand, real gross-domestic-product growth is expected to slow down in 2022 from 2021, according to FactSet. That doesn’t do any favors for value stocks. On the other hand, prices of many value stocks are already reflecting slower growth, making those shares relatively attractive,” according to Barron’s.
SPHQ holds both growth and value stocks. Its allocation to the former is just over 24% while its value weight is about 29%.
The fund devotes nearly 38% of its weight to technology stocks. That’s a significant overweight to that sector relative to the S&P 500 and confirmation that the sector has some value while being chock full of quality. A substantial portion of SPHQ’s value tilt is sourced from the financial services sector, which accounts for 23.2% of the fund’s weight. That group is home to firming balance sheets and rising dividends, two quality hallmarks.
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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.