Quality is a metric that applies to many things: The making of a piece of furniture or a new car, the beauty and technique of a piece of artwork and, of course, the soundness of one’s investments. In the case of exchange-traded funds (ETFs), few ETF managers know this better than those who lead the Invesco S&P 500 Quality ETF (SPHQ), counsels Jim Woods, editor of The Deep Woods.

Formed in 2005 by Invesco, SPHQ’s mission is to provide exposure to S&P 500 firms with sound fundamentals. To accomplish this goal, SPHQ focuses on three quality metrics.

The first metric is return on equity (ROE), which measures overall profitability. The second is lower accruals, which is the change in net operating assets scaled by the average net operating assets over the past two years. This metric is used to potentially signal higher earnings quality. Finally, there’s financial leverage, which measures risk and earnings stability.

These metrics are then equally weighted to produce a quality score. SPHQ takes only the top quintile and scales them based on this quality score. Its exposure to any one specific market sector is capped at 40%, making it a particularly diverse ETF.

The index it bases its investments on is rebalanced semi-annually. Currently, SPHQ has $7.32 billion in assets under management, and the fund’s expense ratio is 0.15%.

Almost all SPHQ’s holdings are US-based. Its primary market sector is technology, which makes up over 54% of its portfolio after combining its various submarkets, such as health technology. SPHQ is diversified, however, with additional allocations in sectors such as commercial services and energy minerals. Its current top holdings include NVIDIA (NVDA), Microsoft (MSFT), Alphabet (GOOG), Apple (AAPL), Visa (V), and Exxon Mobil (XOM).

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As of the close of trading on Feb. 6, the fund was up 6.6% in the last month, 13.1% in the past three months, 4.9% year to date, and 23.8% in the last 12 months.

Quality isn’t just about picking the best products at the best price. It’s also about knowing what’s best for you. And making wise investment decisions is no different. So, keep an eye towards quality by considering your investment goals and doing your due diligence before adding any stock or ETF to your portfolio.

Recommended Action: Buy SPHQ.

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