Investors have been steadily pouring money into the Invesco S&P 500 Quality ETF this year
The AI buildout is not the only thing investors cite as they move toward quality, according to Rene Reyna, Invesco's head of ETF strategy.
In a sign that investors are feeling anxious about the outlook for the stock market, they have recently shown a clear preference for "quality" shares, which tend to fare best during periods of broad market declines, over the previously highflying momentum stocks.
The S&P 500 is weighted by companies' market value, which means shares of companies with higher market capitalizations have more influence than those with lower market caps. There are various ways to invest along with the index or to try to outperform it by applying factors to hold subsets of the S&P 500.
If you hold shares of the $818 billion State Street SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the S&P 500 SPX by holding all of its stocks, you can see how technology stalwarts and rapid growers dominate. The top five holdings of SPY - Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and two common-share classes of Alphabet (GOOGL) (GOOG) - make up 30.6% of the portfolio.
There are various exchange-traded funds that include S&P 500 stocks but have different risk profiles, including the lower-risk $99 billion Invesco Equal Weight S&P 500 Index ETF RSP, in which each component is weighted the same, the even-lower-risk $19 billion Invesco S&P 500 Quality ETF SPHQ, and the more aggressive $22 billion Invesco S&P 500 Momentum ETF SPMO.
Rene Reyna, Invesco's head of ETF strategy, told MarketWatch that flows of new money into the quality ETF $(SPHQ)$ have been steady for most of this year, with positive flows every month except for August. That month, $680 million flowed out of SPHQ, while $714 million flowed into the momentum ETF $(SPMO)$. But in September, the action was subdued and in the opposite direction, with $3.4 million flowing into SPHQ and $43 million flowing out of SPMO. (See below for what constitutes quality and momentum.)
What might make the quality approach work, for now
During the first half of 2026, the equal-weighted approach fared well, with RSP returning 12%, while the S&P 500 returned 10.2%. But SPHQ did even better with a first-half return of 20.8%, while SPMO shined with a 36% return.
SPHQ holds the 100 stocks among the S&P 500 that rank highest according to a quality score that combines returns on equity, debt-to-book value and an "accruals ratio" of operating assets to total assets. The index tracked by this fund is rebalanced twice a year. Each stock is weighted by the product of its quality score and its market capitalization.
SPMO holds the 100 stocks of companies in the S&P 500 with the highest "momentum scores." Twice a year, the components of the S&P 500 are ranked by how much their prices have risen over the previous 12 months, then scored to take volatility into account. The portfolio is made up of the 20% of companies in the S&P 500 that score highest, which are then weighted by a combination of the momentum score and market capitalization
Here's the latest year-to-date performance chart for the three ETFs and the full S&P 500:
The Invesco S&P 500 Quality ETF has underperformed the S&P 500 so far this year. The Invesco Momentum ETF tends to outperform the full index during bull markets, but it can underperform during down periods for the broad market.
The chart shows that SPMO has experienced quite a bit of volatility this year, with prices coming down significantly since June 30.
Longer term, SPMO has been a stellar performer, with a five-year return of 137%, against 83% for the S&P 500 and 75% for SPHQ.
But according to Reyna, SPHQ is the safer play for investors during periods of souring sentiment. When asked how SPHQ might help investors who are questioning whether or not the trillions of dollars being spent on the build-out of artificial-intelligence infrastructure will eventually be justified through profits, he said that based on meetings with clients, "the challenge appears to be beyond AI."
He said that prior to the latest U.S. consumer-price index report, which showed inflation at a seasonally adjusted annual rate of 3.7%, "we were looking at a low probability for another rate increase" when the Federal Reserve meets next week.
And Reyna said investors were also watching 10-year U.S. Treasury notes BX:TMUBMUSD10Y, which were yielding 5.02% early on Thursday. He said a 6% 10-year yield would represent a "challenge" to investors, who "might want to take a 6% return rather than the risk in the stock market."
When compared with the S&P 500's price movement, SPMO has had 142.48% upside capture over the past year, with 106.4% downside capture, according to Reyna. Meanwhile, SPHQ has had 86.05% upside capture, with only 61.1% downside capture. Basically, you might not make as much with quality relative to momentum when the market is rising, but you also lose a lot less when the market falls.
For investors who wish to stay invested while softening the effect of a possible market correction, the lower-volatility approach has been gaining in popularity.
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-Philip van Doorn
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