2026 may be known so far as the year that investors finally rotated away from mega-cap tech and growth stocks. It also represents the re-emergence of one of the market's most important themes -- quality.
Owning quality companies never really goes out of style. It may be in or out of favor with the markets at any given point in time, but the idea of filling your portfolio with companies that have healthy balance sheets, strong cash flows, and growing profits should be everlasting.
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Throughout the past few years, the quality factor has done especially well given that several of the names at the top of the Invesco S&P 500 Quality ETF (SPHQ 1.27%) were the Magnificent Seven stocks. Not surprisingly, it wasn't able to keep up with the Nasdaq 100 since the beginning of 2023, but it did outperform the S&P 500 (^GSPC 1.23%). And it did it with about 10% less volatility.
SPHQ Total Return Level data by YCharts
Given that more than 25% of this ETF's portfolio is currently dedicated to tech stocks (and has been for a while), it would make sense if we saw the Invesco S&P 500 Quality ETF lag a bit alongside it.
Instead, this ETF is up more than 7% year to date (as Feb. 25, 2026), way ahead of the 1% return for the S&P 500 and the flat performance of the Nasdaq 100.
How is this fund doing as well as it was when mega-cap tech was both leading and lagging?
How the Invesco S&P 500 Quality ETF has gotten it right
This ETF selects companies from the S&P 500 index based on three factors: return on equity (ROE), the accruals ratio, and the financial leverage ratio. A quality score is calculated for each stock based on these metrics. The stocks with the 100 highest quality scores are included in the portfolio, with all components getting score-weighted.
If you look at the fund's top 10 holdings from a year ago, they include Meta Platforms, Apple, Netflix, and Nvidia all receiving weightings of at least 4%. Today, Apple and Lam Research are the only tech names in the fund's top 10. Meta, Netflix, and Nvidia are nowhere to be found.
NYSEMKT: SPHQ
Key Data Points
What happened? The specific selection methodology is a bit of a black box. Is it possible that AI-related capex spending raised the financial leverage ratio of these companies enough to kick them out of the index? It's difficult to say for sure, but the portfolio seems to have reconstituted itself in the right way over the past 12 months.
This is a big part of the reason why I think the Invesco S&P 500 Quality ETF is so overlooked right now. Having a piece of your portfolio dedicated to quality companies makes sense. The way that this ETF builds its portfolio, however, has kept the focus on the right quality measures.
So far, that has really paid off in fund performance.
