SPHQ: Bringing Clarity to Quality | ETF Trends

Quality is perhaps the most debated investment factor because, unlike growth, size and value, there’s fluidity in defining exactly what constitutes a quality stock. As such, the various exchange traded funds focusing on the factor bring different methodologies to the table. That includes Invesco S&P 500 Quality ETF (NYSEArca: SPHQ).

SPHQ follows the S&P 500 Quality Index. Member firms are companies from the S&P 500 with impressive quality scores, “which is calculated based on three fundamental measures, return on equity, accruals ratio, and financial leverage ratio,” according to Invesco.

The $3.34 billion SPHQ turns 17 years old in December, confirming it has a battle-tested, lengthy track record. On a related note, investors have long prioritized the quality factor.

“High-quality companies have always been appealing to investors. In fact, Benjamin Graham documented quality equity investing as early as 1949 in his original publication of The Intelligent Investor,” according to S&P Dow Jones Indices.

Though not as large as growth or value, the field of dedicated quality ETFs is well-populated, indicating it’s advantageous when one of these products has avenues for standing out. It can be argued that SPHQ possesses that advantage by way of offering advisors and investors an easy-to-comprehend methodology.

“Despite a wide range of definitions for what constitutes a high-quality company, characteristics such as profitability, competitive position, earnings quality, corporate governance, and modest debt levels seem to be common markers agreed upon by the investment community,” adds S&P Dow Jones.

Acknowledging that earnings growth and low leverage, among other traits, are integral in the quality equation, sector attribution is pivotal with this investment factor. SPHQ features exposures to all GICS sectors, but perhaps not surprisingly, the Invesco ETF allocates almost 34% of its weight to tech stocks.

SPHQ allocates about 13% of its lineup to financial services and real estate stocks, which is relevant because under the S&P quality methodology, “the accruals ratio calculation will not be applied. The return on equity (ROE) and low financial leverage (LEV) ratios will only be used to calculate a stock’s quality score.

The surprise among SPHQ’s sector exposures is a 14.05% weight to energy, indicating that the sector has reduced leveraged and bolstered balance sheets in recent years. Another quality attribute is shareholder rewards, something both the energy and technology sectors are offering investors due to solid levels of free cash flow generation.

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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.