Exploring opportunities and a flight to Quality

Investors seeking to manage volatility may want to consider strategies that provide access to Quality companies that show signs of financial strength

History has shown that long-term investment returns are achieved by remaining invested in the market; in fact, missing just a few days can determine whether investors ultimately achieve their long-term investment objectives.

Yet as coronavirus-related volatility continues to roil markets, investors are naturally concerned by the undetermined length of the economic shutdown, the potential for relapse, and the long-term outcomes on investment portfolios. As a result, they may be looking for exposures that can help mitigate risk while also allowing them to participate in the market’s eventual recovery.

I believe that recent market declines give investors an opportunity to reposition their portfolios by upgrading to ETFs that can help manage volatility and mitigate downside risk, as well as provide diversified access to those companies with fundamental strength. Investors seeking to manage volatility may want to consider strategies that provide access to companies with lower volatility, or strategies that help them access Quality companies.

What is a Quality company?

What constitutes a “Quality company,” anyway? Simply put, a quality company is often characterized as one with strong measures of financial health, including strong cash flow, low leverage, and a high return on equity with a solid balance sheet.

By this definition, the Quality factor is more concerned with a company’s financial position rather than earnings growth or valuation.

Why consider Quality now?

During periods of economic turbulence and credit stress, investors may look to companies demonstrating financial strength. Amid lingering uncertainty over the speed and strength of the post-pandemic economic recovery, Quality companies are naturally better-positioned to handle economic adversity, compared to companies that have poor cash generation and high leverage.

How does Quality perform in a bear market?

Quality may equal opportunity for investors. Quality has tended to show outperformance against the S&P 500 Index when the S&P 500 is declining, while lagging slightly when the S&P 500 is rising. 1 Therefore, Quality companies are more defensive in nature, but still allow investors to participate in periods of economic strength.

Several Quality companies have made the news in recent weeks, including two held by Invesco S&P 500® Quality ETF (SPHQ): Johnson & Johnson (5.78%2) and Proctor & Gamble (4.72%2), which reported strong Q1 profits and dividend increases. Although P&G’s results were supported by COVID-19 buying patterns, the company indicated it would pay over $7.5 billion in dividends and buyback between $7 to $8 billion in 2020, highlighting its financial strength and robust cash flow generation.3

SPHQ also holds Gilead Science, Inc. (2.012), which is thought to have developed a breakthrough COVID-19 treatment.4 Three brokers recently raised the possibility of Costco, another holding (2.132), paying a special dividend. The ability of a company to pay a special dividend is a sign of operational strength and robust cash flow generation.

As investors look to mitigate the risks arising from an uncertain earnings season, Quality companies could be a powerful addition to their portfolios.

How can investors access Quality companies?

The Invesco S&P Quality ETF suite offers investors exposure to equities with solid fundamentals, including a healthy balance sheet, higher profitability potential, strong operating cashflows, lower leverage, and consistent earnings quality. By investing in the highest quality quintile of its parent index, our Quality suite provides access to those firms with the requisite discipline and financial strength to weather the market’s storms while also capitalizing in periods of market strength.

1 Source: Bloomberg, L.P. as of April 24, 2020

2 Holdings data as of April 28, 2020

3 Source: Bloomberg, L.P. as of April 17, 2020

4 Source: Bloomberg, L.P. as of April 14 and 17, 2020

Important information

Blog header image: Sarah Brown / Unsplash

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Investments focused in a particular sector, such as information technology, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

Please see the website for complete holdings information. Holdings are subject to change.

There is no guarantee that low-volatility stocks will provide low volatility.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The S&P 500® High Quality Rankings Index is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company’s earnings and dividends.

Certain funds and portfolios, particularly the Invesco ETFs, in and of themselves do not qualify as diversified investment strategies.

Before investing, investors should carefully read the prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the Fund call 800 983 0903 or visit invesco.com for the prospectus.

Nick Kalivas is a Senior Equity Product Strategist representing Invesco’s exchange-traded funds (ETFs). In this role, Mr. Kalivas works on researching, developing product-specific strategies and creating thought leadership to position and promote the smart beta equity lineup.

Prior to joining Invesco, Mr. Kalivas spent the majority of his career in the futures industry, delivering research, strategy and market intelligence to institutional and high net worth clients centered in the equity and interest rate markets. He was a featured contributor for the Chicago Mercantile Exchange, and provided research services to a New York-based global macro commodity trading advisor where he supplied insight on equities, fixed income, foreign exchange and commodities. Nick has been quoted in the Wall Street Journal, Financial Times, Reuters, New York Times and by the Associated Press, and has made numerous appearances on CNBC and Bloomberg.

Mr. Kalivas has a BBA in accounting and finance from the University of Wisconsin – Madison and an MBA from the University of Chicago Booth School of Business with concentrations in economics, finance, and statistics. He holds the Series 7 and Series 63 registrations.

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