Despite the S&P 500 extending last year’s rally and touching on new highs this year, investors don’t quite have the risk dial turned up to maximum level. An article by VettaFi’s Head of Research Todd Rosenbluth revealed a measured move towards quality options in the current market environment during a VettaFi Equity Symposium.
Quality was second to growth when it came to the preferred factor of choice among asset managers in symposium attendance. This corroborates with quality-focused ETFs witnessing higher volume. It hints that investors are optimistic about rate cuts to come. Still, they aren’t ready to throw risk aversion out the window.
There is a forthcoming presidential electio,n and rate cuts still at the ready amid another Fed pause. Investors and advisors certainly need to exercise due diligence when constructing a portfolio. Quite simply, they need to be more choosy.
“Stocks look well positioned to outperform bonds and cash again this year, but high valuations mean investors need to be choosy,” a BlackRock quarterly outlook noted.
Rather than handpick names that skew towards quality, investors can remove the guesswork by opting for the Invesco S&P 500 Quality ETF (SPHQ). In essence, it tracks the S&P 500 Quality Index (SPXQUP). The index includes names that have the highest quality score. It calculates score based on fundamental measures, namely return on equity, accruals ratio, and financial leverage ratio.
Mid- and Small-Cap Quality Options to Consider
With large cap dominance continuing into the first quarter of 2024, mid-caps and small-caps could soon follow. That being said, there are additional options for investors who want more focused exposure to quality factors. This is achievable even with a slant towards mid-cap or small-cap equities.
For the former, consider allocating to the Invesco S&P MidCap Quality ETF (XMHQ). Mid-caps are an ideal option for investors looking to get the stability of large caps while also attaining the growth potential of small caps. In essence, mid-caps provide that health median between the two.
XMHQ follows the S&P MidCap 400 Quality Index (SPMQUP). The Index holds approximately 80 securities in the S&P Midcap 400® Index that have the highest quality scores, which are computed based on a composite of three proprietary factors.
When markets trend higher or lower, small caps can make amplified gains in both scenarios. Investors willing to accept the higher risk in order to extract the growth potential, but still seeking to maintain a quality profile to mute volatility, consider the Invesco S&P SmallCap Quality ETF (XSHQ).
The fund is based on the S&P SmallCap 600® Quality Index (SP6QUP). The index is deeply diversified, consisting of 120 securities in said index that have the highest score. Like SPHQ, score is calculated based on the average of three fundamental measures: return on equity, accruals ratio and financial leverage ratio.
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