On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the Invesco S&P 500 Quality ETF (SPHQ) with Chuck Jaffe of “Money Life.” The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund, on point for today, the expert to talk about it. Welcome to the ETF of the Week, where we examine trending, new, newsworthy, unique, and intriguing exchange traded funds with Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you will find all the tools and research you need to be a savvier, smarter investor in ETFs.
Todd, happy 4th of July! Great to chat with you again.
Todd Rosenbluth: Happy 4th of July to you, Chuck! I’m excited to be here and to celebrate this holiday with you.
Chuck Jaffe: Your ETF of the Week is…
Todd Rosenbluth: The Invesco S&P 500 Quality ETF, SPHQ.
Chuck Jaffe: The Invesco S&P Quality ETF, SPHQ. So, July 4th, it’s all about the greatness of the country. Quality, that’s kind of a theme. Is that the reason?
Todd Rosenbluth: You’re right. So the S&P 500 is the granddaddy of the U.S. equity benchmarks that are tied to ETFs. And then, the quality companies within are companies that have the strongest balance sheets, consistent earnings records. These are companies that are well-positioned to withstand the next 200-plus years of our country. Probably even more than that. And that’s why we think this is a great ETF to focus on, and it’s doing quite well!
It’s actually outperforming the broader S&P 500. It’s seen inflows. There’s a lot of things to like about SPHQ.
Chuck Jaffe: Quality has become a theme, a factor, if you will. The same way that investing for growth or value has been, etc. But quality is also in the eye of the beholder. So with this fund, what are they doing to determine quality? And I think most people think, S&P 500, if you’re in there, you’ve gotta be a decent company. So how many of those decent companies are quality companies?
Todd Rosenbluth: So let me cover a few of those questions. SPHQ holds about a 100 stocks, so it’s 1/5th of the broader S&P 500. You’re right. The S&P 500 is large-cap companies that have already strong enough earnings and strong enough characteristics to make it into the S&P 500. So this is the cream of the crop.
These are companies that have the strongest balance sheets. These are companies that have consistent earnings in order to make it in, and the strongest of those earnings. So, a company like Visa, for example, or Broadcom, those are a couple of the larger holdings. Procter and Gamble is a top-10 holding. I would probably think of that as among the bluest of blue chips.
Johnson & Johnson is within the portfolio. I’m drinking a Coke, coincidentally because it’s a part of the portfolio as well. These are the companies you would think of as high-quality, blue chip companies. And then what’s great about this is that with the index behind the ETF SPHQ, you get a rebalance that gets reconstituted a couple of times throughout the year to make sure that these companies are the best of the best.
Chuck Jaffe: Well, there’s a few names that you left out because. Nvidia is the largest holding of this fund. Alphabet’s in there. Microsoft’s in there. Apple’s in there. But it’s not weighted the S&P 500 way, because Broadcom’s in there, and Mastercard’s in there, in the top couple of holdings.
So explain a little bit about how this fund weights things.
Todd Rosenbluth: You’re right. It’s not constructed from a market-cap-weighted basis. It’s constructed based on quality. So there are companies that are going to rise based on in between the periods of rebalance. And as such, you’re going to see some deviations. Companies are not weighted the same way in the beginning of that rebalance period and toward the middle and the end of it.
But, you’re right. Nviaia has climbed within the S&P 500. Apple and Microsoft, those three companies were neck and neck at the time that we were recording this, in terms of the largest companies. You’re gonna get broader diversification with SPHQ than you would through an S&P 500 market-cap-weighted ETF from iShares or Vanguard or State Street.
So this, for many people, could be a core replacement. Instead of having the S&P 500 on its own as your U.S. equity large-cap exposure, we’re finding many advisors are looking at an ETF like SPHQ to get your core equity exposure, but with a tilt toward those highest-quality companies.
Chuck Jaffe: Now it’s really interesting that this fund holds a hundred stocks, and you just said you’ll be more diversified here than you would be with a traditional or classic S&P 500 fund, and that’s because of the weighting. Obviously, 500 stocks, more than a 100 stocks, but the weighting being so different because it’s not weighted by market capitalization. That’s one interesting side of this.
I have another. When we talk about quality — and, again, it’s a big factor and it could be there — is the other side of this that it cuts it off at a 100? In other words, could I be looking at other ETFs and say, yes, we’re into quality, but they’re picking 200 because you could get 200 quality names. Is this also benefiting from not really tight concentration, but enough concentration that you see the quality really shine through?
Todd Rosenbluth: Yes. I think that you wanna focus on the top. When you’re looking at a factor, you want to make sure you’re getting exposure to that factor, and make sure you’re getting only the companies that rise to the top. There are certainly oriented ETFs that are relative. They’re looking at quality or they’re looking at value or other factors, from a relative stance.
So, the best of the companies within a certain sector, the best of the companies within a broader index, but the the bar is not raised as high. With SPHQ, you’re not having to be constrained by an individual sector. For example, there are a lot fewer energy companies than you’d find within the broader market. And that, we think, is a good thing. It’s going toward where the highest-quality companies happen to be. You named some of them.
Those are household names. You’re likely to know every company that you’d find within this portfolio of SPHQ, because these are the best of the best companies. And we think that helps to position this ETF for the second half of the year and to survive any volatility that we see heading into the election and anything else. And I’ll have a hot dog with some mustard on it at your barbecue.
Chuck Jaffe: Well, my father would have loved this fund because he always said that he loved funds where he could look through and recognize every name. And you could indeed pretty much recognize every name here. You said this could be a core replacement. Is this also a case where somebody who’s got a good core might want to say, let me split it in two and say, I’ve got the broad market covered, and then I’m tightening my focus on quality with these names?
Todd Rosenbluth: Yes. You could certainly tilt toward quality instead of going all of your U.S. large-cap equity exposure into SPHQ and tilt it. Again, I don’t recommend people sell ETFs just for the sake of selling them, because you’re going to incur capital gains in all likelihood, given how strong the market has been for the longer term. So, we think people certainly want to be thinking about how they can complement an existing strategy with any new ETF. And SPHQ is going to hold the companies you would have within an iShares, Vanguard, or State Street S&P 500 ETF, but screen and filter out those less-quality companies, and only the best of the best.
So this SPHQ ETF could pair very well with your broader ETF. So, add a sausage along with my hot dog, Chuck.
Chuck Jaffe: There you go. So, quality foods, quality companies, quality ETF, as we celebrate the qualities of the United States as we get into the July 4th holiday. It is SPHQ, the Invesco S&P 500 Quality ETF, the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, enjoy the the dog and the sausage and anything else, and we’ll see you after the holiday.
Todd Rosenbluth: You have a good one too.
Chuck Jaffe: The ETF of the week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yep, I’m Chuck Jaffe. I’d love it if you’d check out my show at MoneyLifeShow.com, or by going to wherever you look for great podcasts. And if you’re looking for great information on exchange traded funds, make sure you include VettaFi.com in your search. At VettaFi, they’ve got all the tools you need to be a better investor in ETFs. They’re on Twitter or X at @Vetta_Fi. And Todd Rosenbluth, their head of research, my guest, he’s on Twitter too. He is @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. We’d love it if you’d follow along, to make sure you don’t miss an episode. And until next week, well, happy holidays everybody, and happy investing!
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