Qn re: SPHQ ETF Change in "Quality Index"

ibartman

E T F.com reports [http://www.etf.com/sections/daily-etf-watch/daily-etf-watch-powershares-fund-changes] that SPHQ will be changing it's index:

The PowerShares S&P 500 High Quality Portfolio (SPHQ | A-79) will change its name to the PowerShares S&P 500 Quality Portfolio and its index from the S&P 500 High Quality Rankings Index to the S&P 500 Quality Index.

Anyone familiar with differences between the old and new indices or any other info related to the change?

Thanks.

msf

Here's S&P's page on S&P 500 Quality Index:
http://us.spindices.com/indices/strategy/sp-500-quality-us-dollar

and the page on the S&P 500 High Quality Rankings Index
http://us.spindices.com/indices/strategy/sp-500-high-quality-rankings-index

You can compare their performance by using the graph in the upper right. If you're using the latter page, enter "500 Quality" in the search box to get the new index.

Here's the prospectus update, that has a 1 paragraph description of the new index:
http://www.sec.gov/Archives/edgar/data/1209466/000119312515407937/d233411d497.htm
(see last paragraph on the page)

Looking at the two methodologies, it seems that S&P is using the same rules for rating the quality of each stock - based on return on equity, accruals ratio, and leverage. The new index selects the 100 highest quality stocks and then weights them. The old index includes all stocks ranked A- quality or above, and then weights them.

heezsafe

Ah, yes, the "passive" index fund that "actively" morphs under your feet, sometimes over and over.....

Here's another recent example of the same thing about to happen at Vanguard:
https://personal.vanguard.com/us/insights/article/fund-announcement-Z-implementation-122015

In this one, you'll note that the index fund and its ETF (VEA) will be changing because they will be adopting another index as their benchmark (and thereby become different index funds). But wait--- there's more! For six months, as they are becoming new index funds, they will benchmark to yet another index, a "transitioning" index if you will, called the FTSE Developed All Cap ex US Transition Index.

ibartman

msf & heezsafe - Thank you.

Pretty similar. [Just kidding!] Darn it! What do I replace SPHQ with....?
(If anyone can come up with alternatives, please post here. Thanks again.)

>>> Hope that someone else picks up the OLD index!

OLD INDX TOP 3 SECTORS

Industrials............. 27%
Consumer Discretionary.. 20%
Consumer Staples........ 17%

OLD INDX's TOP 10 BY WEIGHT

Hormel Foods Corp HRL Consumer Staples
Raytheon Co RTN Industrials
Walt Disney Co DIS Consumer Discretionary
Johnson & Johnson JNJ Health Care
Ross Stores Inc ROST Consumer Discretionary
Emerson Electric Co EMR Industrials
NIKE Inc B NKE Consumer Discretionary
3M Co MMM Industrials
Omnicom Group OMC Consumer Discretionary
Praxair Inc PX Materials

-----------------------------
NEW INDX TOP 3 SECTORS
Information Tech........ 25%
Industrials............. 20%
Health Care............. 20%

NEW INDX TOP 10 BY WEIGHT

Johnson & Johnson JNJ Health Care
Apple Inc. AAPL Information Technology
Gilead Sciences Inc GILD Health Care
Home Depot Inc HD Consumer Discretionary
Intl Business Machines Corp IBM Information Technology
Boeing Co BA Industrials
Mastercard Inc A MA Information Technology
PepsiCo Inc PEP Consumer Staples
Visa Inc V Information Technology
3M Co MMM Industrials

ibartman

One possible answer ... suggested [?] by looking (at Morningstar) for concentrated owners of Hormel Foods (the top holding of the old index) would/might be....

And the winner is ...... Miss Columbia!

... No, that's not right. Here it is (at the bottom of the card):

Proshares S&P 500 Dividend Aristocrats E.T.F. [NOBL] ...?

msf

Those top ten lists (I didn't look that closely) are really interesting. From the brief descriptions, I had assumed that the only difference between the indexes would be the cutoff in the number of stocks selected - a fixed top 100 for the new, and more or fewer for the old (depending on how many stocks were ranked A- or better). Also that the relative weights would be the same (just scaled differently because there would be different numbers of stocks in the two lists).

I was wrong on both counts. The reordering of top ten (e.g. J&J moved from 4th to 1st) shows the weighting algorithm is different. The presence of Apple in the new but not the old index shows that the candidate stocks are different as well - either that or Apple got a really low weighting in the old index, which seems unlikely (even with a different weighting algorithm).

All of this raises the question - what are you looking for in a substitute? Same stocks (as implied by your suggested alternative)? Similar sector weightings? Same style box (cap size/style)? Same geography (US, or is foreign okay)? Yield? Concentration?

The M* basic (free) ETF screener can do a pretty good job, if you know what you're looking for. If you just use a single criterion: ETFs with at least 20% in industrials, you've already eliminated 93% of the ETFs in the database. (Note, I'm using the GIC Industrials classification, not M*' Industrials category, since the classifications posted above are GICs).

If we ignore sector ETFs and foreign ones, we're down to just 8 large cap blends (including SPHQ), 3 midcaps, and 8 small caps.

If we look for funds with at least 10% consumer staples (including companies like Hormel), we've eliminated 99% of ETFs. All of those remaining have a fair amount of consumer discretionary. Focusing on the diversified US ETFs, we have just six large cap blends (including SPHQ), and one mid cap.

Eyeballing these, the closes appears to be First Trust Capital Strength (FTCS). Closest in industrials (25.95% vs. 26.85%), it is also fairly close in the consumer categories: staples (20.23% vs. 17.60%) and discretionary (16.12% vs. 19.19%). Trailing twelve month yield is also very similar, at 1.94% vs. 1.81%.

The portfolio is more concentrated, with 50 stocks vs. 132 for SPHQ. But NOBL also has just 50 stocks, so that doesn't seem to be a concern for you.

The overlap of FTCS with SPHQ seems about the same as that of NOBL.
- FTCS doesn't have #1 Hormel, but it does hold #2 Raytheon while NOBL doesn't.
- Neither NOBL nor FTCS hold #3 Ross, #6 Yum, #7 Nike, or #10 Disney.
- All of them have a healthy slug of #4 J&J.
- Only FTCS shares #5 Omnicom and #9 Lockheed; only NOBL shares #8 McCormick.

Overlap using M*'s stock intersection (premium) tool.

Here's a tool for looking at ETF correlation, unfortunately FTCS isn't in its database.
http://www.etfreplay.com/correlation.aspx

But that's just one way of looking for similar ETFs. What you consider similar depends on what you consider important. Me, I'd just get VIG (or more likely, VDADX) and call it a day. It's among the six large cap blend finalists, cheaper, also focused on high quality stocks, from a great fund sponsor, much higher volume and AUM (for ETF pricing purposes).

Or if you're open to actively managed funds, VDIGX. Here's a M* column comparing the two Vanguard funds: http://news.morningstar.com/articlenet/article.aspx?id=666314

ibartman

msf - Thank you! for suggestions and hint re: M* tool.

I was looking for similar sector weightings and portfolio metrics in a relatively diversified US stock fund.

I didn't know that you could do industry concentration screens with the M* Tool. I will check out NOBL [35 bps ER, $1B AUM] and FTCS [65 bps ER, $165MM AUM].

(Once SPHQ changes to new index, it seemed to me that there wouldn't be anything distinctive about it, as was the case with the old index.)

davidrmoran

I can see why one might be interested in NOBL compared with VIG or SCHD, but why when compared, at any point in its life, with RPG, FCNTX, FLGEX, or any cheap SP500 index? When you look closely at the curves, it doesn't even seem to offer downside cushioning particularly. So what's the notional appeal?

ibartman

Mutual funds that might be useful in replicating - to some degree - the soon-to-vanish SPHQ (an E.T.F. that currently follows the S&P High Quality Rankings Index) would seem to include the following:

DRIPX: The MP 63 Fund http://portfolios.morningstar.com/fund/summary?t=DRIPX
MPGFX: Mairs & Power Growth Fund http://portfolios.morningstar.com/fund/summary?t=MPGFX
VDIGX: Vanguard Dividend Growth Fund http://portfolios.morningstar.com/fund/summary?t=VDIGX

The first fund [DRIPX] is obscure but available at TDAmeritrade.

ETFs that could be used to construct similar exposure include:

FTCS: First Trust Capital Strength http://portfolios.morningstar.com/fund/summary?t=FTCS
NOBL: ProShares S&P Dividend Aristocrats http://portfolios.morningstar.com/fund/summary?t=NOBL
SPLV: Powershares S&P500 Low Volatility http://portfolios.morningstar.com/fund/summary?t=SPLV
VIG: Vanguard Dividend Appreciation http://portfolios.morningstar.com/fund/summary?t=VIG
XRLV: Powershares S&P500 Ex Rate Sensi L V http://portfolios.morningstar.com/fund/summary?t=XRLV

However, I have mixed feelings about the third and fifth ETFs [SPLV & XRLV], since they are offered by Invesco Powershares, the same folks that are in the process of monkeying with (i.e., IMHO destroying) SPHQ by switching its index to one that has a very different exposure - in terms of sectors and industries - than that (currently) used by SPHQ when it was posting it's admirable record over the last 5 years or so.

Keeping it 'simple' (HAH!), a 50/50 blend of MPGFX and SPLV appears to have very similar exposures and performance, based on historical performance (and for 2009 - 2011, when SPLV did not exist for full year,using SPLV Index returns from S&P website less SPLV tracking error of 26 bps from E T F.com).

Looking at individual holdings of each...

MPGFX owns 50 stocks
SPLV owns 100 stocks
SPHQ owns 132 stocks (current index, until March 2016)

The 50/50 blend of MPGFX & SPLV has 139 stocks. There are 11 stocks shared between MPGFX & SPLV, representing about 19% of the balance of the blended 50/50 portfolio.

Comparing the "BLEND" (MPGFX+SPLV; 50/50) with SPHQ, there is an overlap of 61 stocks. This represents, by dollar balance, 45% of BLEND and 49% of SPHQ.

Of course, most of the "heavy lifting" is being done by SPLV, since both it and SPHQ are subsets of S&P 500. Comparing SPLV only with SPHQ, 51 stocks are shared between these two ETFs. They represent, by balance, 51% of SPLV and 39% of SPHQ.

Again, let me know - via a post here - if you folks come up with other potential 'substitutes'. Thanks.

ibartman

Continuing....

Most of the sectors are fairly close, except for Consumer Cyclical and Financial Services - pity. But the broad "super sectors" (Cyclical, Sensitive & Defensive) are spot on. It is also a shame that the blended E.R., at 45 bps, is 16 bps higher than SPHQ.

But again, after March 2016, SPHQ will no longer "be" SPHQ. It will be a very different E T F with very different holdings, "trying to pass" as the old SPHQ.

Another comment. If you look at the [Documents] tab of SPHQ, and open up the fact sheet,
you will see a graph suggesting that the ETF has underperformed the S&P 500. While this is true over the life of SPHQ, it is not true since the SPHQ index last changed at the end of June, 2010.

According to M*, over the last 5 years, SPHQ has outperformed Vanguard's S&P 500 Index Fund Admiral Class by about 73 bps per year, with risk (measured either by Standard Deviation or Beta) that was about 10% less than the 500 Index.

In other words, by stapling the new post-June 2010 index onto the SPHQ in 2010, Powershares produced an E T F that looked like an underperformer, in their own marketing materials.

Other risk measures from M* are available here:
http://performance.morningstar.com/fund/ratings-risk.action?t=SPHQ

Morningstar sector allocations are below, for MPGFX, SPLV, their 50/50 blend, and SPHQ.

Exp Ratio	65 	25	45 	29 
Sector	        MPGFX	SPLV	BLEND	SPHQ
Basic Materials	11.60 	4.31    7.96 	6.79 
Consumer Cyc	5.13    3.01 	4.07 	19.21 
Financial Svcs	12.99 	16.99 	14.99 	4.71 
Real Estate	0.00 	6.82 	3.41 	0.83 
Cyclical	29.72 	31.13 	30.43 	31.54 
				
Comm Svcs	0.00 	4.17 	2.09 	0.79 
Energy	        2.83 	0.00 	1.42 	1.26 
Industrials	32.25 	19.31 	25.78 	29.03 
Technology	7.37 	0.00 	3.69 	4.17 
Sensitive	42.45 	23.48 	32.97 	35.25 
				
Cons Defensive	8.69 	20.44 	14.57 	16.77 
Healthcare	19.15 	13.48 	16.32 	10.45 
Utilities	0.00 	11.44 	5.72 	5.97 
Defensive	27.84 	45.36 	36.60 	33.19