You want to invest in solid, high-quality companies. It’s a cornerstone of smart, long-term investing. But what does “quality” actually mean? If you ask four different ETF providers, you’ll get four different answers.
Welcome to Factor Flavors, where we dissect how different factor ETFs, all seemingly targeting the same goal, take remarkably different paths to get there. These different methodologies result in unique performance, risk profiles, and portfolio allocations.
Today, we’re putting “Quality” under the microscope. We’re comparing four popular large-cap quality ETFs against each other and their benchmark, the SPDR S&P 500 ETF Trust (SPY).
- QUAL – iShares MSCI USA Quality Factor ETF
- SPHQ – Invesco S&P 500 Quality ETF
- JQUA – JPMorgan U.S. Quality Factor ETF
- FQAL – Fidelity Quality Factor ETF
Let’s explore their different flavors. 🕵️♂️
A Tale of Different Markets
A quick look at performance shows there’s no single “best” quality ETF. The winner changes depending on the market environment.
In the challenging market of
2022, when the S&P 500 fell over 18%, two of our quality funds truly lived up to their defensive reputation.
JQUA and SPHQ significantly outperformed, dropping only -13.44% and -15.73% respectively, showcasing their ability to protect capital in a downturn.
However, in the bull run of 2023, a different flavor of quality took the lead.
QUAL surged an incredible 31.74%, handily beating both the S&P 500 (26.14%) and its quality peers. This tells us that some quality strategies are built for defense, while others are built to run.
Under the Hood: Why Are They So Different?
The performance differences aren’t random; they’re a direct result of how each fund defines and targets “quality.” Their underlying portfolios are surprisingly distinct.
SPHQ: The Concentrated Defender 🛡️
This ETF takes a “best-of-the-best” approach, selecting the top 100 stocks from the S&P 500 with the highest scores for return-on-equity, accruals, and financial leverage. This concentrated strategy leads to dramatic differences from the benchmark. SPHQ has a massive overweight to the
Consumer Staples sector (around 19%) compared to the S&P 500’s meager 6% allocation. This defensive tilt is a primary reason for its strong performance in down markets. Its low 20% holdings overlap with the S&P 500 confirms it’s marching to the beat of its own drum.
QUAL: The Sector-Neutral Specialist ⚖️
QUAL’s strategy isn’t to pick the “best” sectors, but to find the best companies
within each sector based on high return-on-equity, stable earnings, and low financial leverage. By design, its sector weights stay much closer to the overall market. However, its selection process leads to a significant overweight in
Information Technology (33% vs. SPY’s 25%). This tech-heavy stance, combined with a higher beta (1.02 over 3 years), helps explain its stellar performance during the 2023 tech-led rally.
JQUA: The Small-Ball Player ⚾
While still a large-cap fund, JQUA has a noticeable tilt toward smaller companies. It holds over
27% in Mid-Cap and 9% in Small-Cap stocks, far more than its peers. This gives it a unique risk profile and a different engine for potential growth. It defines quality through profitability, earnings quality, and solvency. This approach also gives it the lowest Price-to-Book ratio of the group (5.37), suggesting a slight value orientation.
FQAL: The Low-Leverage Fortress 🧱
This ETF from Fidelity seeks companies with a “higher quality profile than the broader market”. While its description is broad, its portfolio characteristics are specific and powerful. FQAL’s holdings have the
lowest long-term debt-to-equity ratio (68.36) of the group, meaning it focuses intensely on companies with pristine balance sheets. This focus on solvency pays off in its risk profile; over the last three years, FQAL has had the
best downside capture ratio (92.44%), meaning it has lost less than any of its peers during market downturns.
Choose Your Flavor
So, which flavor of quality is right for you?
- Seeking strong defense and a concentrated portfolio that looks very different from the S&P 500? SPHQ is your pick.
- Wanting a bull-market performer that finds quality across all sectors and leans into technology? QUAL could be the answer.
- Looking for a quality approach with a tilt toward mid-caps and a hint of value? JQUA offers a compelling profile.
- Prioritizing pristine balance sheets and the best-in-class downside protection over the long run? FQAL is built like a fortress.
The key takeaway is that you should always look beyond the label. ETFs targeting the same factor can be wildly different under the hood. Understanding their unique flavors is the key to building a better portfolio.
Go Deeper and Run Your Own Comparisons
The data in this post was pulled from our comprehensive Fund Comparison Report. This is just a small taste of the insights you can uncover. With the full report, you can dive deeper into:
- Head-to-head risk statistics like Alpha and Sharpe Ratios.
- Complete sector and market-cap breakdowns.
- Detailed fundamental metrics from P/E ratios to ROE.
- Top 10 holdings and portfolio overlap analysis.
Want to see the full report and run your own comparisons? Create your free account today and unlock the tools you need to find the perfect factor flavor for your portfolio.
This content was created with the assistance of AI and is for informational purposes only. It is not a recommendation to buy or sell any securities.
