Investors Look to Equal-Weight and Quality Factors in 2023 | ETF Trends

Investors are looking to the equal-weight and quality factors as they navigate a cloudy economic outlook.

The Invesco S&P 500 Equal Weight Portfolio (RSP) and the Invesco S&P 500 Quality ETF (SPHQ) are Invesco’s two most popular ETFs year-to-date, as measured by net flows. While equal weight was a favored factor approach in 2022, quality’s surge in interest is unpresented.

“Higher-quality ETFs can serve as a fundamentally focused, modestly lower-risk core equity strategy for advisors,” Todd Rosenbluth, head of research at VettaFi, said. “Quality stocks tend to do better in periods where in general earnings are expected to be weak and investors gravitate to companies with stable cash flows and strong balance sheets.”

SPHQ has taken in $650 million in net flows year-to-date as of January 30, while RSP has seen $1.1 billion in net flows year-to-date. Over a one-year period, SPHQ has accreted $1 billion and RSP has taken in $4.6 billion in net flows. RSP and SPHQ have $36 billion and $4.4 billion in assets, respectively, according to ETF Database.

SPHQ tracks the S&P 500 Quality Index, which includes 100 companies from the S&P 500 that have impressive quality scores, which are calculated based on three fundamental measures: return on equity, accruals ratio, and financial leverage ratio.

Notably, the ETF uses an accruals ratio and not earnings growth, and SPHQ does not have sector constraints that are aligned with the broader market, meaning the fund can significantly over- or underweight certain sectors, according to Rosenbluth.

The sector tilts that quality introduces to a portfolio, as compared to the cap-weighted S&P 500, include overweighting IT, energy, and consumer staples, and underweighting financials, consumer discretionary, and communications, as of December 30.

Equal weighting comprises every constituent of the S&P 500, giving each company an equal weight at each quarterly rebalance. Equal weight provides exposure to the small size, value, and dividend factors, while tilting away from quality.

The sector tilts introduced by equal weight include overweighting industrials, real estate, materials, and utilities, and underweighting IT, healthcare, and communications.

RSP and SPHQ are up 5.63% and 3.57%, respectively, compared to the S&P 500’s gain of 4.75% during the same period. Over a one-year period, RSP is down just 0.88%, while SPHQ and the S&P 500 are down 7.76% and 7.83%, respectively, each on a total return basis.

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