Focusing On Quality With ETFs in September

August was not the best of months for stocks and was noted earlier this week, September's reputation is not stellar, either. The S&P 500's nearly three percent loss on Tuesday certainly qualifies as an inauspicious start to the ninth month of the year. 

Investors that insist on remaining long stocks and those looking to do some value hunting amid global equity market turbulence might do well to focus on the quality factor, the investment factor that serves as the backbone for the PowerShares S&P 500 High Quality Portfolio SPHQ. The $487.8 million SPHQ tracks the S&P 500 High Quality Rankings Index, which holds “stocks reflecting long-term growth and stability of a company's earnings and dividends,” according to PowerShares. 

That is “a benchmark whose constituents earn an S&P Capital IQ Quality Ranking of A- or above. These companies have exhibited relatively strong earnings and dividend growth records over the past 10 years. The S&P Capital IQ Quality Ranking is a quantitatively derived risk considerations metric used in our ETF ranking process, but is just one of 10 inputs that also include S&P Capital IQ STARS and S&P Capital IQ Qualitative Risk Assessments generated by our equity analysts. S&P Dow Jones Indices, which runs SPHQ's underlying index, operates independently from S&P Capital IQ,” said S&P Capital IQ in a new research note. 

S&P Capital IQ rates SPHQ overweight, its highest rating for ETFs, and named the fund its focus ETF for September.

Home to 133 stocks, SPHQ's quality emphasis results in, perhaps not surprisingly, a scant energy sector allocation of less than 1.2 percent. That is the ETF's smallest sector weight. Industrials, another laggard group, are SPHQ's larges sector weight at 26.8 percent while consumer staples and discretionary names combine for about 36.6 percent of the fund's weight.

“According to Sam Stovall, U.S. equity strategist for S&P Capital IQ, S&P 500 index constituents with above-average S&P Capital IQ Quality Rankings had a beta of 0.9, while those companies with below-average Quality Ranking (B or below) had a beta of 1.3 -- and 1.1 for those with average rankings (B+),” said S&P Capital IQ.

Translation: SPHQ should be less volatile than the broader market when volatility ticks higher. And that has led to slightly better performance as SPHQ has outpaced the S&P 500 by 86 basis points on a year-to-date basis.

Although SPHQ's dividend yield of 2.05 percent is slightly below the yield on 10-year U.S. Treasurys, the ETF is an avenue to dependable dividend raisers as over a quarter of SPHQ have dividend aristocrats status, meaning those stocks have boosted payouts for at least 25 consecutive years.