Invesco S&P 500 Quality ETF(SPHQ) Smart-Beta Strategy

Trading News - The Invesco S&P 500 Quality ETF (SPHQ), with its $5.1 billion in assets under management as of April 2023, has been garnering noteworthy investor interest throughout the ongoing year. It ranks third in the accumulation of net flows year-to-date across Invesco’s portfolio of ETFs. By the beginning of June, SPHQ witnessed an impressive accretion of $1.1 billion, a testament to the trust investors placed in this ETF. Over a one-month period alone, the ETF pulled in a solid $193 million in net flows.

Investor interest in SPHQ can be attributed to various factors, one of them being the shift towards high-quality companies with a track record of consistent earnings and robust balance sheets. Todd Rosenbluth, head of research at VettaFi, noted that given the market's volatility, advisors are leaning towards diversified portfolios comprised of blue-chip companies.

The quality factor of SPHQ's composition has also been influential in its returns, in spite of its focused exposure. When compared to the broader S&P 500 index, the ETF has exhibited similar returns across different periods. For instance, as of June 5, SPHQ registered an 11.2% increase year-to-date, only slightly under the S&P 500's rise of 12.1%. Over a one-year period, SPHQ actually outperformed the S&P 500, registering a 6.2% climb in comparison to the S&P 500's 5.8%.

This trend persists over extended durations. Over a three-year span, SPHQ appreciated by 39.5%, in comparison to the S&P 500's 40.3% increase. Over a five-year duration, SPHQ even managed to outdo the S&P 500, returning 72% compared to the S&P 500's 69.7% gain.

These figures can be linked back to the underlying strategy of SPHQ, which is built upon tracking the S&P 500 Quality Index. The Quality Index identifies the top 100 stocks within the S&P 500 using a quality score. The score is determined based on three crucial financial indicators: return on equity, accruals ratio, and financial leverage ratio. In essence, SPHQ provides investors exposure to companies exhibiting the strongest financial health within the S&P 500.

In addition to returns, it's crucial to consider the sector weightings within SPHQ. The fund introduces unique sector tilts to its portfolio compared to the benchmark S&P 500. For instance, the underlying index of SPHQ overweights the energy sector and consumer staples sector, both by 12%, compared to 5% and 7% in the benchmark S&P 500 respectively. Conversely, the index underweights the consumer discretionary sector and utilities sector, at 3% and 0% respectively compared to 10% and 3% in the benchmark.

Fast forward to June 7, 2023, SPHQ witnessed an approximately $115.6 million dollar inflow, translating to a 2.3% week-over-week increase in outstanding units. Among its largest underlying components, KLA Corp was down by about 0.1%, while TJX Companies and Vertex Pharmaceuticals were up by about 1.7% and 0.5% respectively.

Technically, the ETF showed strength, with its one year price performance chart showing that SPHQ's 52 week range low point is at $39.18 per share, with $48.9971 as the high point, the last trade being $48.98. Comparing the most recent share price to the 200 day moving average provides valuable insights into the ETF’s performance, and SPHQ has demonstrated a steady trend in this regard.

By June 20, the 30-Day SEC Yield for SPHQ stood at 1.65%, with the fund yielding an annual rate of 1.78%. In terms of holdings, SPHQ is committed to tracking the investment results of the S&P 500 Quality Index, ensuring a minimum investment of 90% in the underlying index's securities.

The determination of the quality score utilizes three fundamental measures: return on equity, accruals ratio, and financial leverage ratio. With its semiannual rebalancing and reconstitution, the ETF introduces the 100 stocks with the highest quality score. The portfolio guarantees sector representation, with no single sector constituting more than 40% of the ETF's holdings.

Industry ratings indicate strong confidence in SPHQ. Schwab, a leading brokerage firm, awards the ETF a 3-year rating of four and 5-year and 10-year ratings of five. Historic returns rate as a four, while risk receives a rating of two. The current yield is 1.77% and the 5-year dividend growth rate is 8.74%. Coupled with a net expense ratio of just 0.15%, SPHQ provides a compelling investment opportunity, underscored by a 5-year return just over 62% and a 10-year return nearing 169%, excluding dividends.

How S&P 500 Quality Index ETF SPQH Works?

One fundamental aspect worth exploring is the factor-based investing strategy that SPHQ adopts. Known as "smart-beta" in financial parlance, factor-based investing aims to enhance returns and minimize risk by selecting stocks based on attributes, or factors, that are associated with higher returns. In the case of SPHQ, the emphasis is on the 'quality' factor. This ETF specifically seeks out companies with strong balance sheets, consistent earnings, and potential for sustainable growth, thus enhancing its allure, especially during periods of economic uncertainty.

In comparing SPHQ with other popular S&P 500 ETFs, the Vanguard S&P 500 ETF stands out as a noteworthy peer. However, while the latter also provides exposure to the S&P 500, its investment approach differs from SPHQ. It does not utilize the quality score metric, making SPHQ a potentially more selective and targeted investment.

The sectoral diversification in SPHQ also deserves a deeper look. By overweighting certain sectors like energy and consumer staples, SPHQ offers a differentiated exposure compared to the standard S&P 500. For instance, these sector tilts could provide defensive characteristics, given the essential nature of products and services offered by companies in these sectors. On the other hand, underweighting sectors like consumer discretionary and utilities suggest a lesser emphasis on industries more susceptible to economic downturns.

Finally, considering the dividend yield is crucial for income-focused investors. As of June 20, 2023, SPHQ yields 1.78% annually and shows a promising 5-year dividend growth rate of 8.74%. While these figures are attractive in the current low-interest-rate environment, it's equally important to note that they are not guaranteed and depend on the underlying companies' ability to sustain their dividends.

To conclude, SPHQ's track record and investment approach indicate a robust strategy that combines exposure to high-quality S&P 500 companies with sector-specific tilts and a competitive dividend yield. However, as with any investment, it's essential for potential investors to consider their personal financial goals, risk tolerance, and investment horizon before making a decision.
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