Quality stocks and the related exchange traded funds aren’t proving immune to this year’s broader market retrenchment, but weakness among stocks with the quality designation could spell opportunity for long-term investors.
Among quality ETFs, the Invesco S&P 500 Quality ETF (NYSEArca: SPHQ) is one of the more established ideas to consider. SPHQ tracks the S&P 500 Quality Index, meaning it’s home to plenty of members of the standard S&P 500.
As such, the fund isn’t perfect in a rough market climate, such as the one investors are contending with this year, but SPHQ is modestly outperforming the S&P 500 year-to-date.
“Admittedly, stocks with high-quality attributes have not been immune from this year’s volatility,” Citigroup equity strategist Scott Chronert wrote in a note. “Why? Essentially, Quality factor attributes do not completely insulate a stock from multiple contraction, sector performance dynamics, or company specific fundamental disruption.”
Modest as it is, SPHQ’s outperformance of the S&P 500 is impressive because the quality ETF is significantly overweight to the technology and financial services sectors relative to broader benchmarks. Tech is one of this year’s worst-performing groups, while financial services is an abject disappointment, particularly when considering that interest rates are rising. Despite its struggles, SPHQ could offer long-term investors a variety of favorable traits.
“Nevertheless, they may limit single-stock volatility relative to alternatives,” Chronert said. “Further, business model stability should provide some relative performance respite to macro and rate policy concerns, while participating to the upside, should the broader market mean revert higher.”
Citi ran a pair of screens for quality stocks that appear interesting today, and across a variety of sectors, some SPHQ holdings appeared. For example, Ross Stores (NASDAQ:ROST), which is one of SPHQ’s consumer discretionary holdings, is on the Citi list.
Likewise, Capital One (NYSE:COF) and Synchrony Financial (NYSE:SYF) are the two financial services names appearing on one of the screens, and both are SPHQ member firms. Mastercard (NYSE:MA), which accounts for 4.82% of the SPHQ lineup, is one of the tech names on the Citi screen.
Among stocks that screen well on the basis of low debt ratios and appealing price-to-earnings ratios, EOG Resources (NYSE:EOG) is on that list. That’s SPHQ’s largest energy holding. Mining giant Newmont Corp. (NYSE:NEM) is a materials name that fits that bill. Newmont is the second-largest materials holding in SPHQ.
Overall, the $3.49 billion SPHQ holds 102 stocks, but real estate, communication services, and utilities stocks combine for just 1% of the fund’s roster.
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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.