What Makes This Quality ETF Tick

Amid increased concerns about equity market volatility and leveraged balance sheets, the quality factor has been receiving renewed attention.

Several exchange traded funds, including the Invesco S&P 500 Quality ETF SPHQ, offer direct exposure to the quality factor.

What Happened

The $1.26 billion SPHQ, which turned 13 years old earlier this month, follows the S&P 500 Quality Index. Quality can be combined with other investment factors, though it often naturally overlaps with some factors, including low volatility.

“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. “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.”

Why It's Important

SPHQ's underlying index is comprised of 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.

The ETF is home to 99 stocks from 10 sectors. Utilities is the lone sector currently not represented in the fund. Owing to some significant amounts of leverage, the materials, energy and real estate sectors combine for just 5.5 percent of SPHQ's roster.

Technology is by far SPHQ's largest sector allocation at almost 35 percent followed by consumer staples at just over 15 percent. Indicating that there is some factor overlap here, over half of SPHQ's large-cap holdings are classified as growth or value stocks.

What's Next

“Market volatility has a way of making investors rethink defensive equity strategies,” said S&P Dow Jones. “The S&P 500 Quality Index, with a high hit rate of 75% during down months, is a factor that has historically had a higher degree of downside protection compared with riskier factor strategies.”

Investors are displaying some affinity for SPHQ. Over the past 90 days, the fund has seen inflows of nearly $42 million, according to issuer data.

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