Invesco S&P 500 Quality ETF SPHQ builds a portfolio of profitable industry leaders with solid balance sheets. Its quality orientation should help the fund fare better during market downturns, but its active bets won’t always pay off. All told, favoring high-quality stocks and charging a low fee should yield better results than its Morningstar Category index over the long haul, supporting a Morningstar Analyst Rating of Silver.

The fund tracks the S&P 500 Quality Index, which sweeps in high-quality stocks from the S&P 500. S&P’s quality score favors more-profitable companies while trying to steer clear of those that rely on debt financing or have been aggressively growing their assets. The index ranks all S&P 500 constituents by their quality score and picks the highest-ranking 100. It weights selected holdings by the product of their market cap and their quality score.

The fund’s portfolio scores better on profitability metrics, such as return on invested capital, than both the Russell 1000 Index (the category index) and the S&P 500 (its selection universe). The companies featured in its lineup tend to be established businesses with strong and stable cash flows. However, this strategy doesn’t take valuations into consideration. This could limit its upside potential as high-quality stocks tend to fetch premium price multiples. Indeed, the fund’s price/book ratio has historically been higher than the category index's.

While its index has buffer rules that allow stocks to temporarily deviate from its initial inclusion criteria, the fund’s annual turnover still ranges between 50% and 70%. High turnover can increase trading costs and detract from performance. The fund also carries considerable concentration risk at both the sector and holding level. As of September 2022, the fund was overweight in financials and energy stocks. Its narrow 100-stock portfolio means that it also tends to be top-heavy. It typically invests around 40% of its assets in its top 10 holdings, despite caps on individual positions meant to promote diversification.

Over the past five years, the portfolio lagged the Russell 1000 Index by 54 basis points annualized thanks to omitting highfliers like Tesla TSLA and Alphabet GOOG/GOOGL. But its risk profile panned out. The fund exhibited lower volatility and experienced less of its parent universe’s downside. That put the fund’s risk-adjusted returns on even footing with the Russell 1000 Index.

Analyst Rating

A straightforward approach to quality.

Director

Bryan Armour

NVIDIA

Mastercard

Alphabet

Exxon Mobil

Apple

Microsoft

Broadcom

Visa

Procter & Gamble

AbbVie

The fund tracks the S&P 500 Quality Index, which targets constituents of the S&P 500 with the highest quality scores. S&P measures quality with three metrics: return on equity, financial leverage (debt/book value), and balance-sheet accruals (change in net operating assets over average net operating assets). The 100 stocks with the highest quality scores are selected for the final lineup.

The portfolio weights stocks by the product of their quality score and market cap. This tilts it toward larger, higher-quality names. The index implements several weighting constraints: The minimum position size is 0.05% of the portfolio, the maximum position size is the lower of 5% of the portfolio or 20 times a stock’s weight in the market-cap-weighted S&P 500, and no sector can account for more than 40% of the portfolio.

The index reconstitutes semiannually in June and December. Current holdings stay in the index so long as they don’t drop below the 120th rank by their quality score. This helps keep a lid on turnover and related trading costs.

Above Average

Process

Invesco's equity index management team enjoys strong support from the broader Invesco organization. The named managers boast a wealth of experience with strong supporting infrastructure, including supporting analysts, traders, and technology platforms. It earns an Above Average People Pillar rating. 

Pratik Doshi, Peter Hubbard, Michael Jeanette, and Tony Seisser manage this portfolio. Hubbard leads Invesco's index portfolio management team, while Jeanette leads the equity team under Hubbard. Jeanette and Seisser have been portfolio managers at Invesco since 2008 and 2013, respectively. Doshi joined Invesco in 2018 as an analyst and became a named manager in 2020. 

The managers benefit from a solid pool of resources from Invesco. This includes a team of analysts who help with corporate actions and determine what steps the managers need to take to prepare for upcoming index changes. Invesco's proprietary portfolio management dashboard has helped automate much of the managers' workflow. Trades are executed by Invesco's global trading desk, allowing the managers to focus on mitigating tracking error and improving tax efficiency. The team is subject to independent risk oversight.

People

Invesco, with USD 1.3 trillion in AUM, tries to cover a great many bases. The firm succeeds in a number of areas but also has its share of subpar offerings, along with many others somewhere in the middle. The firm retains a Morningstar Parent rating of Average.
Invesco is now 3.5 years past the closing of its merger with OppenheimerFunds. While there were some glitches, overall the process avoided the pitfalls that can accompany such corporate actions. On the positive side, Invesco’s international-equity teams—its EQV team in Texas and the New York-based group inherited from Oppenheimer—remain strong points. The firm’s ETF lineup includes the popular Nasdaq-focused QQQ; passive strategies make up around 30% of Invesco’s AUM. 
However, the extensive U.S.-equity lineup remains a weak link despite manager shuffles aimed at bolstering poor performers. The retirement of Meggan Walsh, who managed the relatively few appealing offerings in that group, didn’t help. Fixed-income offerings run the gamut: The multisector and short-term-bond areas are good, but corporate high-yield is less impressive.
Invesco has a substantial presence outside the U.S., but fund performance has been subpar in Asia, with manager turnover an ongoing concern. In the U.K. and Europe, the picture has brightened, but that region still can’t be considered a strength.

Average

Parent

Invesco S&P 500 Quality ETF

SPHQ tracks an index of US large-cap stocks selected by return on equity, changes in net operating assets and financial leverage. Stocks are weighted by these quality factors, scaled by market cap.

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