Investors pondering when growth stocks are going to get back to their old ways or when value stocks will regain the form seen earlier this year may want to focus elsewhere. The quality factor is an excellent starting point.
Just look at the Invesco S&P 500 Quality ETF (NYSEArca: SPHQ). After a steady, multi-month grind higher, SPHQ is higher by 19.33% year-to-date as of Aug. 3 – an advantage of 134 basis points over the S&P 500.
While SPHQ’s impressive 2021 run may have some investors thinking they’ve missed the quality boat, some market observers believe the factor’s run is just getting started. That could be a sign SPHQ is a credible near- to medium-term idea.
“While investments that benefit from broad-based growth, such as cyclical and value sectors, still have room to run, we think it is time to add quality stocks to the portfolio – or those companies that will benefit once peak growth has passed,” said Gargi Chaudhuri, head of iShares investment strategy for the Americas, at BlackRock, in a Bloomberg interview.
Keeping It Simple with SPHQ
While quality is a well-known investment factor, it’s definition varies among ETF issuers and index providers.
The $3.1 billion SPHQ tracks the S&P 500 Quality Index. Within that benchmark, quality is evaluated on the basis of return on equity, accruals ratio, and financial leverage ratio, according to Invesco.
Another benefit of SPHQ is that it doesn’t force investors to choose between growth and value. Stocks with the growth designation account for 32% of the fund’s roster while value equities represents over 30%. That’s a solid split between those two factors. Adding to the SPHQ case is the overall economic cycle.
“The robust restart will continue to support cyclical, value-oriented companies, but financial markets are anticipatory, and we think that some of the early-cycle investment opportunities may have already played out, especially in the US,” said Chaudhuri.
Remembering that dividends are often seen as a quality trait, SPHQ allocates over 62% of its combined weight to technology, financial services, and healthcare – three of the primary engines of S&P 500 dividend growth. That’s something to consider at a time when S&P 500 payouts are forecast to hit new highs, perhaps as soon as the current quarter. SPHQ’s 1.22% trailing 12-month distribution rate implies ample room for growth going forward.
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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.
