The investing landscape is littered with combinations, such as large-cap growth or small-cap value. Some are official, while others are not.
Officiality aside, some combinations work well together, indicating they’re the peanut butter and jelly of the investing world. One example is the marriage of the quality factor and wide moat stocks. It’s not official, but it is real, as proven by the Invesco S&P 500 Quality ETF (SPHQ).
SPHQ, which tracks the S&P 500® Quality Index, beat the S&P 500 by 300 basis points for three years ending December 18. Add to that, the Invesco exchange traded fund was slightly less volatile on an annualized basis than the parent gauge over that period. Alone, those points confirm that an emphasis on quality, when properly deployed, can benefit investors. However, it should not be ignored that SPHQ’s roster is chock full of stocks with wide moat credentials.
SPHQ: A Wide Moat ETF in Disguise
SPHQ’s aforementioned three-year performance was accrued with below market allocations to the communication services and consumer discretionary sectors. Those are homes to some vaunted wide moat stocks.
Said another way, SPHQ currently doesn’t feature Alphabet (GOOG), Amazon (AMZN) or Meta Platforms (META) among its holdings. However, the ETF’s 34.36% weight to tech stocks, which is about 200 basis points in excess of the S&P 500’s weight to that sector, helps its wide moat credentials.
“The quality score favors stable, profitable companies to those that mortgage their balance sheets for rapid growth. That blueprint makes wide-moat stocks a popular choice. At the end of October 2024, roughly 77% of the portfolio comprised wide-moat companies—about 15 percentage points more than the Morningstar US Large-Mid Index and large-blend category average,” observed Morningstar analyst Ryan Jackson.
He didn’t mention specific SPHQ holdings that qualify as wide moat names, but it’s not a stretch to assume that among the ETF’s tech components, Apple (AAPL) and Microsoft (MSFT) are among those with wide moat chops. That duo combines for 11% of the SPHQ roster.
Mastercard (MA) and Visa (V) also combine for 11% of SPHQ’s portfolio and are the ETF’s two largest financial services holdings. They fit the bill as wide moat fare, as well. The same is true of several of the fund’s consumer staples holdings.
SPHQ’s various “holdings have flexed the merits of their moats. SPHQ ranked in the top 1% of all large-blend funds over the 15 years through October and well within the best quintile over the trailing three-, five-, and 10-year periods,” added Jackson.
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