A Quality ETF Idea For June

Stocks have a less-than-stellar reputation in the month of June, as the S&P 500 often notches slightly negative returns in the sixth month of the year. That does not mean investors need to eschew equities altogether, but June gloom could mean emphasizing factors such as quality could prove rewarding.

The PowerShares S&P 500 Quality Portfolio (NYSE:SPHQ) is one of the more seasoned names among exchange-traded funds dedicated to the quality factor. SPHQ turns 12 years old later this year and has $1.25 billion in assets under management.

Investing In Quality

Quality stocks are assessed for issuers' potential to produce strong profits, as measured by often-overlooked balance sheet measures of financial health. Quality stocks have the potential to generate lower volatility and higher risk-adjusted returns than low-quality stocks, according to PowerShares, the fourth-largest U.S. ETF issuer.

After hitting an all-time high Wednesday, SPHQ is up nearly 8 percent year to date. The ETF is also CFRA Research's focus ETF for June.

A Junebug Of An ETF

SPHQ holds just 100 stocks from the broader S&P 500 index, with screens for companies that have the strongest return on equity, measured by a 12-month trailing earnings dividend by book value; earnings quality using accruals, measured by reviewing the changes in net operating assets; and lowest financial leverage, measured by total debt divided by book value, CFRA Head of ETF & Mutual Fund Research Todd Rosenbluth said in a Wednesday note. The quality index, constructed based on this combined quality score and its market capitalization, is rebalanced semiannually, providing further differentiation from its parent S&P index that is never rebalanced.

SPHQ features exposure to each of the 11 sectors found in the S&P 500, but [with] significant weighting differences. For example, just four sectors technology, industrials, consumer discretionary and consumer staples combine for over three-quarters of SPHQ's weight.

Nearly 90 percent of SPHQ's holdings are large-cap stocks, as highlighted by the average market value of $95.8 billion on the ETF's 99 holdings.

CFRA views positively many of these holdings from both a risk perspective and using our qualitative analytical rigor to assess valuation. SPHQ earns favorable inputs for the S&P Global Market Intelligence Quality Rankings a metric focused on a company's earnings and dividend records and for the S&P Global Credit Ratings of the parent companies of its constituents, CFRA said.

The research firm has an Overweight rating on SPHQ.

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