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When I first started investing, I had the hardest time figuring out which mutual funds to select. Over the years, I’ve learned that the key selection criteria are costs and asset class (e.g., large cap U.S. vs. small cap). Still, with 1,000s of mutual funds and ETFs, picking the right investments can seem overwhelming.

To help, I’ve started this series reviewing mutual funds and ETFs. You’ll still need to decide which investments are best for you (I’m not an advisor), but hopefully these reviews will provide you with a good start. Today we look at the PowerShares S&P 500® High Quality Portfolio (SPHQ).


The PowerShares S&P 500 High Quality Portfolio is designed to provide exposure to stocks in the S&P 500 with long-term growth and stability of earnings and dividends. The Fund is rebalanced and reconstituted quarterly. There are currently 136 stocks in the portfolio.

Invesco PowerShares sponsors more than 140 domestic and international ETFs with over $70 billion in assets. PowerShares seeks to outperform traditional benchmark indexes by using a non-traditional weighting methodology besides market cap.

In other words, an S&P 500 Index fund invests in each of the companies represented in the index. Further, the percentage of the fund invested in each company is proportional to that company’s size as measured by the market value of the company. As a result, an S&P 500 index fund has a greater percentage of its assets in the S&P 500’s large companies than it does its small companies.

The PowerShares S&P 500® High Quality Portfolio, by contrast, does not invest in every S&P 500 company. For those companies it does purchase, it doesn’t use the company’s market capitalization to determine the amount of its investment.


The stated expense ratio is 0.49%. The net expense ratio (what you pay as an investor), however, is only 0.29%. The reason for the difference is that PowerShares agreed voluntarily to waive permanently a portion of the management fee and contractually agreed to waive fees and/or pay fund expenses to prevent the expense ratio from exceeding 0.29% through at least Aug. 31, 2013.

At 29 basis points, SPHQ is more expensive than a traditional S&P 500 index fund. The question investors must ask is whether the investing approach followed by PowerShares is worth the increased cost.


SPHQ has outperformed the S&P 500 over the past three years, but underperformed it over the past five years. Volatility is only slightly less at 11.18% compared to 12.7% for the S&P 500.

SPHQ performance

1 year: 15.16%
3-Year: 15.36%
5-Year: 2.58%

S&P 500 performance

1 year: 13.29%
3-Year: 12.12%
5-Year: 4.94%

Dividend yield

Although the goal of the fund is to focus on dividends, the yield doesn’t show it. The yield of 2.01% is three basis points less than the S&P 500 of 2.04%.

Fund composition and analysis

The top ten holdings as of December 31, 2012 were:

● Hormel Foods
● Target
● Sysco
● Johnson and Johnson
● Omnicom
● Proctor and Gamble
● Kellogg
● Walt Disney
● McCormick and Co.
● UnitedHealth

Style allocation as of December 31, 2012:

Large cap growth: 37.37%
Large cap value: 33.97%
Mid cap growth: 12.51%
Mid cap value: 16.16%:

Sector allocation as of December 31, 2012:

Consumer discretionary: 18.91%
Consumer staples: 21.11%
Energy: 3.43%
Financials: 5.74%
Health care: 10.22%
Industrials: 23.47%
IT: 4.22%
Materials: 7.50%
Utilities: 5.41%

Four sectors represent almost 75% of the fund (consumer discretionary, consumer staples healthcare and industrials). Value and growth are evenly split. The stock trades consistently near its NAV which is positive and prevents the following:

● Investors paying over NAV and being exposed to losses should the premium narrow or disappear
● Investors receiving less than NAV when selling

There is a low bid-ask spread which is positive and prevents investors from losing a significant percentage of their total return as they buy and sell.

My Take

The big question here is whether SPHQ is a better option over a traditional and less costly S&P 500 index fund. For my money, I don’t expect SPHQ to beat the market over the next 20 years, which is how I think about investing. I do, however, like the fact that SPHQ is slightly less volatile than than the S&P 500. But the long term performance and average dividend yield from a fund that focuses on dividends is uninspiring, especially compared to an S&P 500 index fund with a higher dividend a much lower expense ratio. The fund tries to capture superior earnings and dividends, but ends up doing neither.

How to Purchase Shares of SPHQ

Like any ETF, you can purchase shares of SPHQ from your online broker.

Disclosure: I do not own shares of SPHQ as of the date of publication of this review.

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