2023-11-28 17:21:24 ET
Summary
- The Invesco S&P 500 Quality ETF has seen significant changes in its holdings, with technology and healthcare sectors increasing and the consumer defensive sector decreasing.
- The top 5 holdings of SPHQ have shifted, with NVIDIA taking the top spot and Exxon dropping off the list.
- The changes in SPHQ's holdings reflect the evolving trends in the market, such as the rise of technology and the decline of the oil and gas industry.
I wrote an article on Invesco S&P 500 Quality ETF ( SPHQ ) for Seeking Alpha back in February 2023. Every six months the managers of SPHQ recalibrate, combing through the S&P 500 to find the 100 highest quality large-cap companies. A lot has changed since that article nine months ago, and really since December 2022 when SPHQ was recalibrated.
The changes are interesting but don't change the fact that the dominance of a small number of giant stocks has created an era in which too many ETFs look too much like SPY, the S&P 500 ETF. Thus, I rate SPHQ a Hold, which in my terms means it is no better or worse than SPY in terms of the risk I take versus the reward potential for owning it.
Perhaps my views can be summed up by this chart. It shows that without focusing in on a few shorter-term periods of outperformance, SPHQ is highly correlated with SPY. That's a demerit in my book. I am looking for large cap equity ETFs that can outperform SPY, at least during certain market climates.
The companies held within this ETF, and by extension, the companies within the quality large-cap companies in the US market have shifted substantially. The three sectors with the biggest changes in allocation: Technology was 6% greater, Healthcare was 4% higher and Consumer Defensive was nearly 6% lower. That changes the complexion of this ETF, and recently it has been for the better, thanks to continued tech outperformance.
For a closer look at what's happened this year, take a look at the top 5 holdings of SPHQ.
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In February 2023 when I wrote my previous article, the largest holding was Exxon at 5.2%, followed by Apple, Mastercard, Microsoft and Visa.
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Now, In November 2023, Exxon has dropped out of the top 5, and NVDA, which did not even make the top 10 in February, is the largest position at more than 6% of the portfolio. Microsoft, Alphabet, Mastercard, and Apple round out the top 5.
SPHQ gives us a microcosm of the market, a magnifying glass on the top-performing quality companies and how much has changed in 2023. When I take a step back from the financial markets and look around in "real life", as well as the global news, the parallels are striking: Oil & Gas rapidly falling from favor in the public eye as evidenced by protests around the globe. Consumer defensive suffering with the cost of living crisis and supply chain disruptions, and Technology stock prices of all kinds breaking through to new highs, either for the past few years or all-time highs.
Technology has been rapidly evolving in 2023 with no signs of stopping anytime soon. This year saw strides in artificial intelligence ((AI)) and virtual reality ((VR)), the meta-verse and cloud computing. VR, and cloud usage adoption within the healthcare sector have been especially substantial, no doubt this is contributing to growth in the healthcare sector, reflected in the increased investment in and performance of that sector. Tech, especially generative AI and robotics is currently viewed as the path of the future, and this public opinion is reflected in the market performance of companies within this sector.
The question is not whether tech will lead in innovation, but how much of that future excitement is already priced in. Short-term is less clear to me, given the persistence of the biggest tech stocks. Longer-term, I think a lot of it is priced in.
The fact that the Oil & Gas stocks have fallen, with Chevron dropping from the top 10 holdings of SPHQ and Exxon dropping from first to eighth, is indicative of the current trends in government policies as well as investor confidence.
What do these shifts in holdings say about SPHQ? That it remains a Quality ETF, one which keeps pace with the changing forces in the market, by meticulously re-calibrating the holdings every six months. That is more often than many ETFs, which do so annually.
SPHQ should be viewed in context, however. It is what it is: a quality tilt on the S&P 500 Index. As such, it will often move largely in sync with that index. When I do own it is when I believe that the quality factor, and the specific way that SPHQ manages to do that, will outperform the broad market for a period of time.
Today, the ETF is still as concentrated as I like it. 10 stocks make up 47% of assets, and the other 92 names cover the other 53%. I like it this way, though I know many investors do not. I like to know what I own, as I track the individual holdings of my ETFs carefully.
As a 43-year chartist, I may like an ETF but will proceed with extra caution if I find that the charts which make up the top 40-50% of stock holdings look awful. With SPHQ, it is currently more a case of the charts looking toppy, but not yet rolling over. So, like the SPY itself, it is hanging in.
At 21x trailing earnings, SPHQ is not cheap. It is as expensive as the broad stock market, and that has everything to do with "quality" being priced to perfection. As such, I can't recommend SPHQ as a significant upgrade over a pure market index at this point. That, and the potential triple-top I see in the ETF's chart pattern prompt me to rate it a Hold. To be clear, that is versus the S&P 500/SPY ETF, the benchmark that I believe most investors gauge their equity ETF holdings against.
For further details see:
SPHQ: A Victim Of The S&P 500's Circumstances, No Room To Outperform