With the growth vs. value debate commanding so much attention this year, it’s not surprising that the quality factor is getting lost in the shuffle.
It shouldn’t be. Just look at the Invesco S&P 500 Quality ETF (SPHQ ). The Invesco exchange traded fund, which tracks the S&P 500 Quality Index, is higher by almost 21% year-to-date. Recently, quality stocks are picking up the pace, as highlighted by the fact that SPHQ is residing around all-time highs.
More upside for quality stocks could be available into year-end because as the economic cycle evolves, some of the junkier cyclical fare that led broader benchmarks higher earlier this year could fall out of favor, opening the door for high-quality fare to take on leadership roles. What defines quality is notable and what’s even more impressive is that a fund like SPHQ could deliver upside even if broader indexes trade sideways.
“In equities, that means shares of businesses with solid balance sheets, expanding profit margins, and ample and recurring free cash flow. Even if the averages do little in coming months, these stocks are likely to shine,” reports Nicholas Jasinski for Barron’s.
Within SPHQ, quality is measured by return on equity, accruals ratio, and financial leverage ratio, according to Invesco. Confirming that quality often leads to higher bars for entry, SPHQ is home to just 101 stocks. That selectivity could benefit investors as economic growth wanes following stimulus-driven surges earlier this year.
“But the focus on quality will be pivotal, especially moving into the second half of 2022. That’s when the Fed is likely to hike interest rates for the first time in this cycle. By 2023, the economy could return to pre-Covid growth on the order of 2%,” according to Barron’s.
As was seen in the first half of 2021, cyclical value stocks tend to perform coming out of recessions, and while the coronavirus recession was shallow by historical standards, the value trend held true. Fortunately for investors, growth and value stocks can have quality traits, and that is born out in SPHQ. The Invesco ETF allocates 31% of its weight to value equities, with nearly 30% devoted to stocks with the growth designation.
In terms of quality sector ideas, BlackRock advises “overweighting profitable technology companies; financials, including banks, and consumer staples and industrials with those quality characteristics,” adds Barron’s.
Technology and financial services stocks combine for over 60% of SPHQ’s roster. Industrials and consumer staples combine for almost 18%.
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