In what is proving to be a turbulent fourth quarter for U.S. stocks, more advisors and investors are considering factor-based strategies and exchange traded funds.
The Invesco S&P 500 Quality ETF (NYSEArca: SPHQ), which tracks the S&P 500 Quality Index, is one of the ETFs with a direct emphasis on the quality factor. There are varying definitions of quality, “but the common traits are a sturdy business not reliant on a strong economy; high and resilient profitability; and a strong balance sheet unburdened by much debt,” according to CNBC.
While the quality factor often trades at a premium to value, quality stocks are usually less volatile than traditional broad market strategies, indicating some overlap with the low volatility factor.
“Quality, together with other defensive factors such as low volatility, has a higher degree of downside protection compared with other risk factors like value or momentum,” said S&P Dow Jones Indices in a recent note. “For example, during months in which the returns of the S&P 500 are negative, the quality factor has higher returns than the benchmark about 75% of the time.”
Inside SPHQ’s Methodology
SPHQ’s underlying index includes the S&P 500 stocks “that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio,” according to Invesco.