Article

Quality: A factor for all seasons

1 July 2025
Chris Mellor
Chris Mellor
Head of EMEA ETF Equity Product Management
Aerial view of a forest in autumn with a road winding through it.
Key takeaways
1

Factor investing helps simplify decision-making by focusing on proven drivers of long-term return.

2

With strong fundamentals and resilience in tough markets, Quality stands out as a factor that performs more consistently across cycles.

3

The S&P 500 Quality Index, and our ETF tracking it, offers a simple, effective way to access the highest quality US companies.

Forecasting with factors, and how Quality keeps its cool

In an increasingly complex and unpredictable economic landscape, investors are looking beyond traditional asset allocation to strategies that offer more targeted exposure to the drivers of return. One such approach is factor investing, a method that selects securities based on specific characteristics, or ‘factors’ that have been shown, over time, to influence long-term performance. This approach can provide investors with the tools to navigate shifting market conditions based on their goals and risk preferences.

Not all factors are created equal, and their effectiveness can vary over time. Style factors like Value, Size, and Quality each behave differently depending on the market environment. While factors like Value or Size may shine in early stages of economic recovery, Quality stands out for its consistent performance across a range of market conditions.

The Quality factor typically focuses on companies that are highly profitable, carry low levels of debt, and generate stable earnings; characteristics that tend to be more resilient during periods of economic stress or rising inflation. As illustrated in the chart below, Quality historically has outperformed during months when the market has fallen, while it has underperformed modestly during the most risk-on periods over the past 25+ years. This relative protection in weaker markets means that over the whole market cycle a Quality approach has typically outperformed. Since January 1999, the S&P 500 Quality TR index has returned 10.6% per annum, outperforming the S&P 500 TR index by 2.6% per annum with lower volatility (18.1% vs. 19.1% p.a.).

The case for Quality now

The current macroeconomic backdrop makes the case for Quality even more compelling. With question marks remaining on the strength of the US economy and the ongoing spectre of inflation, whether due to trade tariffs or supply chain disruptions, investors are seeking assets that can offer a degree of resilience and consistency. 

Quality stocks, known for their robust fundamentals and earnings stability, are showing they’re well-positioned to navigate this environment. Historically, this combination of slowing growth and rising inflation have been favourable for the Quality factor, as it tended to provide downside resilience alongside steadier performance. This ability to hold up during downturns, while remaining durable in inflationary or volatile markets, makes Quality not only a defensive allocation, but a strategic one. Quality holds up as a factor that could help you withstand even the most uncertain of climates. 

Quality investing in the S&P 500 Index

To bring this concept into focus, the S&P 500 Quality Index utilises the Quality factor by capturing the top 100 companies with the highest quality scores within the parent S&P 500 Index. Its methodology ensures that only companies with strong profitability, clean accounting, and solid balance sheets are included, traits that tended to support consistent performance through economic cycles.

A company’s Quality score is measured by S&P using three fundamental ratios:

  • Return on equity determines how much shareholders earned for their investment in the company, with a high score implying efficient management of the firm’s equity base.
  • Accruals ratio factors cash flow into the assessment of the company’s earnings, with cash earnings viewed as higher quality relative to non-cash earnings.
  • Financial leverage ratio is the degree to which the company uses debt to finance operations. Extensive use of debt can subject a company to interest rate and credit risk, resulting in unstable cash flow and earnings.

The index is intended to maximise exposure to the Quality factor with only limited restrictions on sector allocation (a 40% maximum to any single sector), which historically has resulted in outperformance in falling markets, relative to the broad market and to a sector-neutral approach.

Invesco S&P 500 Quality UCITS ETF

Whether you're building a long-term portfolio or seeking a defensive tilt in the face of macroeconomic headwinds, Quality offers a compelling solution. And with our Invesco S&P 500 Quality UCITS ETF, the first and only UCITS ETF tracking this index, accessing it has never been easier. Our ETF provides a timely solution for those seeking to preserve growth potential while navigating market volatility.  

Discover our ETF

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