The Invesco S&P 500 Quality ETF (SPHQ) is currently a source of frustration for investors who expect high-quality companies to lead during periods of market stress. While the fund has delivered a solid 7% return year to date through late February, it has struggled to maintain momentum during the recent March volatility.
Sure, the S&P 500 Index ($SPX) overall has fallen back quickly. But investors are told to “stay with quality.” However, the stock market is now in an era where so many stocks move together, I have to question old labels like “value,” “yield,” and “quality.” When the bears come to prowl, few, if any, are spared.
The primary reason high-quality stocks aren’t rallying as expected is not necessarily a failure of the companies themselves, but rather a combination of high starting valuations and a specific index methodology that can sometimes leave the fund a step behind the fastest-moving parts of the market.
SPHQ is a $16 billion ETF. It correlates highly with the S&P 500.
The chart picture looks weak at best. This daily view hints at the decline in SPHQ being more the end of the beginning than the beginning of the end.
The weekly chart is shown below. And it looks worse to me. When a 20-week moving average (red line) rolls over, that’s not a healthy trend. See the previous incidence of this, in early 2025.
To SPHQ, “quality” is based on three specific fundamental pillars: return on equity, the accruals ratio, and the financial leverage ratio. By targeting companies with high profitability and low debt, the fund effectively filters for the most stable earners in the S&P 500. However, this focus on financial robustness often leads to a portfolio that is significantly more expensive than the broader market.
A price-earnings ratio of 25x means we pay up for this quality. And in a market where investors are increasingly sensitive to high multiples and sticky inflation, these quality names can face a valuation ceiling that prevents them from pouncing on new moves, even when their underlying earnings remain strong.
Another factor hampering the rally is the specific sector tilt that results from the quality score. The fund currently has a heavy concentration in financials, industrials, and consumer staples, while having significantly reduced its exposure to the mega-cap technology names that drove the market in previous years. While this pivot was intended to reduce concentration risk, it has meant that SPHQ missed out on the final stages of the AI-led surge.
