Amid all the commotion about value stocks soaring and when growth names return to prominence, the quality factor may be lost in the shuffle.
It shouldn’t be the, and the Invesco S&P 500 Quality ETF (NYSEArca: SPHQ) proves as much. The Invesco exchange traded fund is higher by 2.42% over the past month, and with a quality showing signs of coming back into the spotlight, SPHQ’s recent bullishness could be more floor than ceiling.
Among the many benefits of quality stocks and funds such as SPHQ is that companies that fit the quality bill are often less volatile than their lower quality counterparts. What that says is that quality and low volatility frequently intersect, though they are distinct investment factors.
“The fact that low volatility and quality are both doing well is partly explained by the overlap between the two styles,” according to BlackRock research. “Price volatility, which defines the minimum volatility style, is influenced by fundamental volatility. Profitable companies with steady earnings generally experience lower price volatility than companies with highly cyclical earnings.”
Quality Correlations Matter
As BlackRock points out, low volatility and quality are often highly correlated. Since autumn 2020, the correlation between the two factors is 90%.
However, tight correlations don’t always mean lockstep price action. For example, SPHQ is up 14.1% year-to-date, easily beating both the MSCI USA Minimum Volatility (USD) Index and S&P 500 Low Volatility Index. Sector exposures explain some of that gap.
“Investors often associate these styles, particularly min vol, with more defensive sectors, notably staples and utilities. While it is true that by nature, these sectors tend to have stable earnings and lower price volatility, neither investment style is limited to defensive sectors,” notes BlackRock.
SPHQ has no utilities exposure, and staples are merely the fifth-largest sector weight in the ETF at 8.14%, according to issuer data.
Speaking of sector exposures, SPHQ is undoubtedly deriving some benefit from the value resurgence as financial services stocks account for 23.25% of the fund’s roster. Likewise, investors shouldn’t worry about a rapid rerating of growth stocks because SPHQ can capitalize on that trend, should it arrive, by way of its 37.25% weight to tech stocks. As is the case with quality at large, it appears as though SPHQ is doing its job and will continue doing so in the back half of the year.
“Quality and low volatility are performing their function: providing upside while helping to manage overall portfolio volatility,” concludes BlackRock.
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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.