Dissecting 3 Big Quality ETFs

August 09, 2019

SPHQ’s Big Tech & Health Care Bets

Finally, there’s SPHQ. The fund fishes for high quality names in the S&P 500 pond using three measures: profitability as measured by ROE, earnings quality as measured by lower accruals, and earnings stability as measured by financial leverage. Each stock is given a score based on these metrics, and SPHQ invests only in the top quintile.

Our fund report on SPHQ points out that the methodology could lead to “significant active risk/reward relative to the market,” especially because SPHQ only loosely limits sector weightings—each sector can represent as much as 40% of the portfolio.

The fund may have more easy-on-the-stomach valuations, but its sector tilts can be significant. Consider that 60% of the portfolio is currently tied to two sectors: technology and health care—the best and the second-worst-performing S&P 500 sectors this year, respectively.



 SPHQ Factor Tilts


In the end, each of these quality ETFs offers a different take on the quality factor. QUAL may be best for purer quality exposure, but it comes with hefty valuations. DGRW offers a strong growth angle at lower valuations, but it’s also the weakest performer of the three this year. And SPHQ brings relatively attractive value for high quality names, but with significant sector overweights. There’s no such thing as a one-size-fits-all quality ETF.

“No one orders just vanilla ice cream anymore,” Idzal said. “People order Madagascar Vanilla, or French Creme vanilla or salted vanilla ice cream. The same goes for quality ETFs—there’s so much more to understand than just quality.”

For a complete list of quality ETFs, check out our Smart Beta ETF channel.

Contact Cinthia Murphy at [email protected]

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