An emerging trend over the past year in the exchange traded products industry has been an increased number of so-called quality, factor-based ETFs.
In fact, some of 2013’s most successful new ETFs were fund emphasizing a quality approach to stock selection, including the iShares MSCI USA Quality Factor ETF (QUAL) , iShares MSCI USA Size Factor ETF (SIZE) , iShares MSCI USA Value Factor ETF (VLUE) and iShares MSCI USA Momentum Factor ETF (MTUM) . [Winning New ETFs]
Unbeknownst to some investors, the quality approach is not new as highlighted by the PowerShares S&P 500 High Quality Portfolio (SPHQ) . The $331.2 million SPHQ debuted in late 2005 as a high-quality spin on the S&P 500. To be precise, the ETF tracks the S&P 500 High Quality Rankings Index.
“The Index is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company’s earnings and dividends. The Fund and the Index are rebalanced and reconstituted quarterly,” according to PowerShares.
SPHQ offers solid returns with reduced volatility, traits prized by scores of ETF investors as evidenced by the popularity of low volatility ETFs. [Low Vol ETFs Rise Again]
SPHQ “has generated relatively strong performance, with below average volatility. In the three-year period ended February 28, SPHQ rose 15.7%, ahead of the 14.2% achieved by SPDR S&P 500 (SPY 187 Overweight), but through January 2014 SPHQ incurred a beta of 0.87 and a standard deviation of 10.9 compared to 1.0 and 12.2 for SPY, respectively,” said S&P Capital IQ in a new research note.
SPHQ holds nearly 130 stocks, none of which account for more than 1.3% of the fund’s weight. Underscoring SPHQ’s usefulness as protection against rising interest rates, industrials and consumer discretionary, two of the best sectors in rising rate environments, combine for over 45% of the ETF’s weight. Staples and health care combine for almost 30%.
“Among the ETF’s 10 largest holdings used in our analysis, four of them are S&P Capital IQ Strong Buys or Buys. Overall, while SPHQ earns neutral ranking inputs for S&P Capital IQ and S&P Capital IQ Fair Value, it earns favorable inputs for S&P Capital IQ Qualitative Risk Assessments, S&P Capital IQ Quality Rankings and Standard & Poor’s Credit Ratings,” said S&P Capital IQ.
While SPHQ’s average daily volume is just 55,000 share, the ETF’s bid/ask spread is fairly tight at three cents, according to S&P Capital IQ.
Including paid dividends, SPHQ outperformed the S&P 500 twice over the past four years while tying the benchmark index in 2013.
PowerShares S&P 500 High Quality Portfolio
- Investment & Company Information