SPHQ ETF: High Quality, Average Performance

This ETF article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings and weights change over time, updated reviews are posted when necessary.

SPHQ strategy and portfolio

The Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ) has been tracking the S&P 500 Quality Index since 12/6/2005. It has a distribution yield of 1.89% and an expense ratio of 0.15%. The fund invests in the 100 S&P 500 companies with the highest quality score, based on return on equity, accruals ratio and financial leverage ratio. It is rebalanced and reconstituted semi-annually.

The heaviest sector is technology, with about one third of asset value (33.5%). It is followed by energy (14.5%), consumer staples (13.6%) and financials (13.2%). Other sectors weigh 25% in aggregate and less than 8% individually. Compared with the parent index S&P 500 (SPY), the fund overweights technology, energy, consumer staples, materials and to a lesser extent financials. It underweights all other sectors. It almost ignores real estate and utilities.

SPHQ is cheaper than SPY regarding the price/earnings and price/cash flow ratios (see next table). Price/book and price/sales are more expensive, but not much different.

	SPHQ	SPY
P/E TTM	16.46	19.48
Price/Book	3.91	3.61
Price/Sales	2.48	2.31
Price/Cash Flow	12.6	14.31

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Data: Fidelity

The top 10 holdings, listed below, weigh 41.1% of asset value. The heaviest one weighs about 6%, so risks related to individual companies is moderate.

Ticker	Name	Weight%	EPS growth %TTM	P/E TTM	P/E fwd	Yield%
XOM	Exxon Mobil Corp.	5.78	987.11	9.29	8.36	3.19
AAPL	Apple, Inc.	5	8.83	22.86	22.38	0.66
V	Visa, Inc.	4.87	25.45	29.3	24.29	0.89
CVX	Chevron Corp.	4.51	240.94	10.54	9.84	3.06
MSFT	Microsoft Corp.	4.49	3.73	24.66	24.05	1.19
PG	Procter & Gamble Co.	4.18	5.42	23.72	23.56	2.67
MA	Mastercard, Inc.	3.5	23.12	32.54	30.89	0.6
PEP	PepsiCo, Inc.	3.15	19.2	25.85	26.67	2.55
KO	The Coca-Cola Co.	2.89	12.24	26.13	24.01	2.95
COST	Costco Wholesale Corp.	2.78	16.61	37.5	33.83	0.73

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Performance

Since inception in December 2005, SPHQ has lagged SPY by about 1.23 percentage point in annualized return, with a slightly higher risk measured in drawdown and volatility (standard deviation of monthly returns).

	Total Return	Annual.Return	Drawdown	Sharpe ratio	Volatility
SPHQ	247.67%	7.65%	-57.82%	0.48	16.16%
SPY	321.14%	8.88%	-55.42%	0.56	15.65%

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Year-to-date, SPHQ is slightly ahead of SPY. Compared to 2 other quality factor ETFs in 2022, it beats the iShares MSCI USA Quality Factor ETF (QUAL), but lags the American Century STOXX U.S. Quality Value ETF (VALQ).

Comparing SPHQ with my quality model

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, and Altman Z-score.

The next table compares SPHQ since inception with a subset of the S&P 500: stocks with a dividend yield above the average of their respective indexes, an above-average ROA, a good Altman Z-score and a good Piotroski F-score. It is rebalanced annually to make it comparable with a passive index.

	Total Return	Annual.Return	Drawdown	Sharpe ratio	Volatility
SPHQ	247.67%	7.65%	-57.82%	0.48	16.16%
Large cap quality subset	674.57%	12.87%	-40.18%	0.81	15.04%

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Past performance is not a guarantee of future returns. Data Source: Portfolio123

SPHQ lags my S&P 500 quality subset by 5.2 percentage points in annualized return. However, SPHQ performance is real, whereas the subset is simulated. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

Scanning SPHQ with quality metrics

SPHQ currently holds 99 stocks, of which 6 are risky regarding my metrics. In my ETF reviews, risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less reliable. Here, risky stocks weight only 2.1% asset value, which is a good point.

According to my calculation of quality metrics (reported in the next table), SPHQ quality is significantly superior to the benchmark. In particular, the aggregate return on assets is very strong.

	Altman Z-score	Piotroski F-score	ROA% TTM
SPY	3.44	5.78	7.58
SPHQ	4.99	6.44	13.77

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Takeaway

SPHQ invests in the 100 best-ranked S&P 500 stocks using a quality score based on ROE, accruals and financial leverage. It is overweight in technology, with about one third of asset value in this sector. As expected, my own quality metrics confirm the high quality of SPHQ portfolio. Moreover, its exposure to risky stocks regarding my criteria is only 2%. Surprisingly, it is also a bit cheaper than its parent index S&P 500 in valuation. However, historical performance is underwhelming: it has lagged SPY since inception, and its recent performance is average compared with other quality ETFs. For transparency, I have a passive allocation in quality-oriented ETFs (SPHQ is not part of it) and a dividend quality active portfolio of 14 stocks (“Stability” model).