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ETF News And Commentary

With the strength of the market in question looking ahead, many investors are looking beyond broad S&P 500 investments and into higher quality stocks instead. In this way, some are hoping to reduce volatility levels and drawdown levels while at the same time allowing for price appreciation if the market continues to surge.

While there are a number of techniques to do this in ETF form, one overlooked way that this can be accomplished is via the PowerShares S&P 500 High Quality ETF (SPHQ - ETF report). This fund looks to track the S&P 500 High Quality Rankings Index, which is a benchmark of S&P 500 stocks that have solid long-term growth as well as stable earnings and dividends (read Ten Biggest U.S. Equity Market ETFs). 

This approach results in a fund that has about 130 stocks in its basket, charging 50 basis points a year in fees after waivers. Although yield isn’t exactly market beating at 2.0% in 30 Day SEC terms, the fund has shown itself to be less volatile than the overall market, at least when looking at the trailing one year period.

Investors should also note that this focus on quality also drastically alters the sector profile as well as the holdings list for the fund when compared to the S&P 500. In SPHQ, consumer sectors each account for about 19% of assets while industrials take the top spot at just over 25% of the fund (see Top Ranked Industrial ETF in Focus: PRN).

Meanwhile, technology, a top sector in the U.S. economy, makes up less than 5% of the assets in the PowerShares ETF, while energy (3.3%) and financials (5.8%) account for just a small percentage of the overall fund as well.

The fund also allocates assets far differently among the top ten holdings, as Apple and Exxon are nowhere to be found and instead are firms like Hormel Foods, Kellogg, and Ecolab, each of which account for less than 1.4% of total assets.

Obviously in a fund like this the details are important but the real focus for an S&P 500 replacement product like this is how it does against the popular benchmark. From this look, the ETF has performed in line with SPY over the past six months, but with significantly less volatility (read Time to Invest in Low Volatility ETFs?).

From a YTD look and a one year analysis, the trend continues with the S&P 500 jumping out ahead of the ‘high quality fund’ only to see its gains evaporate quickly in bear market periods. With that being said, investors should remember that SPHQ does have a higher expense ratio and a slightly wider bid ask spread so total costs could tilt the total return picture towards the benchmark over longer time periods.

Still, for investors skittish about the market, SPHQ could be a relatively low volatility choice that can definitely outperform during uncertain investing climates. The high quality S&P 500 ETF really earned its keep in the most recent slump, as the fund outperformed the S&P 500 by over 200 basis points in just two weeks time (read Top Performing Country ETF: Turkey in Focus).

One has to wonder if it will again lag on the upside though, especially with history as a guide and its spread out profile which usually means that big gains are hard to come by. If that is again the case, investors should consider this fund one that isn’t really necessary during bullish periods, unless of course you don’t have the stomach for volatility and are looking for a more even-handed approach to broad market investing with ETFs.

Currently, we have a Zacks ETF Rank of 3 or ‘Hold’ on SPHQ, suggesting an in line market performance over the next one year period for this ETF.

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