With the S&P 500 and other widely followed large-cap equity benchmarks mired in bear markets, this year’s assessment of investment factors isn’t as much about good vs. bad as it is about finding options that are less bad.
The quality factor could be an avenue for less bad. It certainly can reduce volatility while positioning investors to capitalize on a potential broad market rebound. Several exchange traded funds are dedicated to quality stocks, including the Invesco S&P 500 Quality ETF (SPHQ ).
SPHQ, which tracks the S&P 500® Quality Index, isn’t a dedicated low-volatility fund, but quality stocks often sport favorable volatility traits, and that’s something for investors to consider in this turbulent macroeconomic environment.
“The ongoing transition in the economy and markets is likely to be bumpy. At this early stage, with inflation just having peaked, investors may be overestimating the speed at which shorter-term dislocations in the economy can normalize (e.g., strong employment alongside high inflation) and underestimating the magnitude and duration of the longer-lasting components of inflation (e.g., wages and shelter costs). Further confirmation of an easing in headline CPI could be supportive of equity markets in the near term, but we are watching company earnings for signs of stress as Fed rate hikes impact the real economy with a lag,” according to BlackRock research.
Another point of attraction with SPHQ is that quality isn’t confined to other specific investment factors. For example, about 31% of SPHQ’s 100 holdings are growth stocks, while almost 27% are value names. That confirms that the fund can capitalize on value strength while positioning investors for a possible value rebound.
“Businesses, whether priced as value or growth, will weather this chapter in history with varying degrees of success,” added BlackRock. “This reinforces the need for selectivity and further argues for a focus on companies with quality characteristics ― particularly strong balance sheets and healthy free cash flow to offer a buffer in the case of a slowdown or profit squeeze. Quality stocks continue to be priced at a discount to the market and, we believe, have potential to outperform as investors look to enhance portfolio resilience amid the prevailing uncertainty.”
A tech rebound would help SPHQ, as it allocates 35.11% to that sector. Defensive consumer staples and financial services stocks combine for 27.21% of the ETF’s roster.
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