Quality ETF Proves Less Bad As Market Slumps

Amid a turbulent start to the year for global equity markets, advisors and investors should be looking for the investment factors that, at the very least, are performing less bad. The low volatility and quality factors come to mind.

Hallmarks of the quality factor, one of the most venerable investment factors, include identifying companies that grow earnings at impressive clips, pay and raise dividends and generated prodigious amounts of free cash.

Just a few weeks into 2016, those traits are helping the PowerShares S&P 500 High Qlty Prtfl (ETF) (NYSE: SPHQ) perform less poorly than the broader market. SPHQ's 6.1 percent year-to-date loss is nothing to brag about, but it is better than the nearly 8 percent shed by the S&P 500.

“High-quality companies have characteristics that are attractive to investors, regardless of market cycles. They tend to generate strong return on equity (ROE) and throw off lots of free cash – fundamental indicators of strength that set them apart from weaker competitors,” said PowerShares in a recent note.

“Return on equity is a barometer of how shareholders are rewarded for their invested capital – with a higher number indicating a greater degree of profitability.”

SPHQ

SPHQ tracks the S&P 500 High Quality Rankings Index, which “is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company’s earnings and dividends,” according to PowerShares. SPHQ's current benchmark trades at a price-to-cash flow premium relative to the S&P 500, but the current premium is well below the historical average.

Related Link: How To Stick With International ETFs In 2016

In two months, the ETF will swap indexes to the S&P 500 Quality Index. As an ETF that emphasizes the quality factor, it is not surprising that SPHQ is lightly allocated to the energy and materials sectors, two of last year's worst performing groups. However, the ETF devotes the bulk of its weight to industrial and consumer discretionary names, two sectors that could struggle in an ongoing bear market, if such a scenario materializes.

Flows data clearly indicate advisors and investors favoring the quality factor to start 2016. SPHQ has added nearly $169 million in new assets, according to issuer data. That total is exceeded by just one other PowerShares ETF.

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