SPHQ: A Smart And Innovative Angle On Large-Cap Investing

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By Sweta Shah

The Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ) is 1 of my favourite halfway equity ETFs. Its portfolio is nan consequence of a consistently applied, rigorous value standing system. This produces a 100-stock portfolio that includes vulnerability to all 11 GICS sectors. There's a batch to for illustration astir an ETF that goes to nan lengths that SPHQ does to place a constricted number of high-quality stocks from wrong nan market's astir celebrated benchmark index, nan S&P 500. I complaint SPHQ a bargain based connected an intermediate- to semipermanent outlook.

Strategy

SPHQ is based connected nan S&P 500 Quality Index, a very circumstantial benchmark that uses a elaborate methodology to prime stocks from wrong nan S&P 500. The money is passively managed and is rebalanced and reconstituted semiannually. In different words, each six months nan head calculates what they mention to as a "quality score" for each banal successful nan S&P 500. That process concludes pinch nan updated constituent stocks that dress up nan scale for nan adjacent six months (on nan 3rd Friday of June and December each year).

That value people is wished by analyzing each stock's return connected equity (based connected trailing 12-month net divided by nan latest book worth per share), accruals ratio (net operating assets complete nan past year, divided by mean full assets complete nan past 2 years), and financial leverage ratio (the company's latest full indebtedness divided by nan company's book value). This produces a 100-stock portfolio, weighted according to nan pursuing formula: (quality score) x (market capitalization). Finally, location is simply a group of information and assemblage constraints and optimization procedures utilized to finalize nan scale for each rebalancing event. The money must clasp astatine slightest immoderate vulnerability to each of nan 11 GICS sectors, though nary individual assemblage tin relationship for 40% of SPHQ's portfolio arsenic of each rebalancing date.

Holdings successful SPHQ person a minimum weight of 0.05%, and a maximum weight that is nan lesser of 5% aliases 20x that stocks' marketplace capitalization successful nan S&P 500. For instance, if a banal is simply a specified 0.1% of nan S&P 500 index, it cannot beryllium brought into this scale astatine a weighting of much than 2.0%.

ETF Grades

• Offense/Defense: Offense

• Segment: Broad Equity

• Sub-Segment: S&P 500 Subset

Technical Ratings

• Short-Term (next 3 months): B

• Long-Term (next 12 months): B

Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor. For a elaborate explanation of MII's proprietary method standing system, spot disclosures astatine bottommost of this report.

Holding Analysis

SPHQ's highly elaborate portfolio building process presently leaves nan ETF pinch a assemblage and apical holdings image that looks for illustration this:

Allocation by assemblage (Seeking Alpha)

Top 10 holdings (Seeking Alpha)

Like nan S&P 500 itself, SPHQ's highest-weighted assemblage is presently technology. More important to maine is nan notable overweighting of energy, which is much than 13% of SPHQ but only 5% of nan S&P 500, pursuing that sector's beardown capacity successful 2022. Consumer cyclical stocks, which are astir 10% of nan S&P 500, only return up 3.5% of SPHQ.

The value look and portfolio building utilized to create and negociate SPHQ is presently favoring sectors that are peculiarly delicate to economical recessions. Those 4 sectors (communications, energy, industrials, and technology), collectively referred to arsenic nan Sensitive Super Sector, relationship for astir 55% of SPHQ. That is simply a astir 10% higher weighting successful those sectors vs. nan S&P 500.

Strengths

SPHQ is rather perchance 1 of nan astir intelligently constructed ETFs devoted to nan U.S. equity market. It screens retired lower-quality stocks. And moreover though nan S&P 500 is thought of arsenic being made up of nan premier companies successful nan U.S. banal market, complete clip institution fortunes tin emergence and fall, but nan banal tin stay successful nan scale for immoderate time. Thus, filtering retired nan highest 100 by this value measurement helps to support nan worst-positioned companies retired of this ETF's portfolio.

SPHQ is abundantly liquid, pinch much than $4 cardinal successful assets and a emblematic day's trading measurement successful excess of $40 million. Furthermore, SPHQ provides vulnerability to a wide scope of companies, yet focuses connected nan precocious extremity of nan 100-stock portfolio. The apical 25 holdings dress up much than 70% of SPHQ, truthful investors tin look astatine this ETF arsenic predominantly a 25-stock portfolio. The remaining 30% of assets person a importantly smaller effect connected performance.

Data by YCharts

Weaknesses

SPHQ is constricted to nan stocks of nan S&P 500. While that has been a awesome spot to beryllium for complete a decade, that could change. For instance, if nan marketplace shifted its accent toward smaller U.S. stocks, non-U.S. stocks aliases both, this ETF mightiness not beryllium arsenic charismatic fixed that limitation.

The strict requirements of this ETF's building methodology tin backfire arsenic well. Its insistence connected including each 11 marketplace sectors mightiness let immoderate lesser-quality companies to sneak into nan portfolio. This is besides not a very precocious yielder. The dividend tends to beryllium astir successful nan aforesaid scope arsenic nan S&P 500, which is not peculiarly precocious successful astir marketplace environments.

Opportunities

The existent marketplace situation could very modulation to what Wall Street calls a "flight to quality." That is, meme stocks and companies pinch dream but not net and unchangeable businesses could autumn retired of favor, arsenic investors flock to much consistent, higher-quality names. SPHQ could beryllium a premier beneficiary of specified a marketplace climate. This ETF runs a focused portfolio, truthful arsenic nan marketplace continues its volatile ways, investors tin quickly cognize what they ain and what's moving this plus successful their portfolio.

Threats

This is still an equity ETF, and nan equity marketplace is very shaky correct now. In addition, nan important allocation to power and exertion stocks is thing that could nutrient much volatility arsenic nan carnivore marketplace continues to activity itself out.

Conclusions

ETF Quality Opinion

I for illustration this ETF's building arsenic overmuch arsenic immoderate I person recovered successful nan U.S. equity category. It does a batch of activity for an investor, utilizing immoderate straightforward quantitative measures, while placing restrictions successful nan correct places (such arsenic nan caps connected position and assemblage size wrong nan portfolio). This is 1 I will beryllium pursuing for sure.

ETF Investment Opinion

I complaint SPHQ a buy. While nary equity ETF tin beryllium considered a high-probability victor successful nan short term, fixed nan assortment of marketplace concerns this study is astir an intermediate- to semipermanent clip frame. And, complete that clip frame, I for illustration SPHQ arsenic 1 of nan amended halfway equity ETFs retired there.

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