A Quality Factor ETF Up 19% YTD | ETF Trends

The quality factor has been one of the standout investment factors this year and plenty of exchange traded funds (ETFs) are participating in that trend. Among dedicated quality ETFs, the Invesco S&P 500 Quality ETF (NYSEArca: SPHQ) is a 2019 leader.

Up nearly 19% year-to-date, SPHQ hit another all-time high on Tuesday. SPHQ is one of the elder statesmen of the quality ETF category, having come to market in late 2005. The ETF’s quality tilt comes by way of emphasizing companies’ long-term earnings growth dividend-paying potential. The underlying index focuses on companies with the highest quality as determined by fundamental measures, including return on equity, accruals ratio and financial leverage ratio.

As more analysts are calling for a shift to quality or companies with healthy balance sheets and strong cash flow, ETF investors can also focus on this segment of the markets for a more defensive portfolio tilt.

SPHQ, which debuted in late 2005, follows the S&P 500 Quality Index. That index tracks S&P 500 members “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.

Where To Find Quality

SPHQ holds 100 stocks and while there are some intersections of the quality and value factors, just over 22% of SPHQ’s holdings are classified as value stocks. However, over 45.50% of the fund’s holdings are classified as growth stocks.

The fund devotes 42.12% of its weight to technology stocks, more than quadruple its second-largest sector weight. Healthcare and consumer discretionary names combine for nearly 21% of SPHQ’s roster.

SPHQ has a 12-month distribution rate of just 1.52%, below the dividend yield on the S&P 500, but plenty of the fund’s components are dividend payers with the capacity to grow those payous. Dividends are often viewed as a quality trait, but investors looking for credible combinations of dividends and the quality should assess factors beyond pure yield. Those factors include return on equity (ROE) and a company’s ability to sustain and grow payouts.

Each of SPHQ’s top 10 holdings pays a dividend and most of those stocks have steadily been increasing those payouts in recent year.

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