The flight to quality doesn’t work like the S&P 500 stalls. This ETF shows why.

The Invesco S&P 500 Quality ETF ( SPHQ ) is currently a source of frustration for investors who expect high-quality companies to lead the way during market stress. While the fund has delivered a 7% return for the year through late February, it has struggled to maintain momentum during the recent March volatility.

Sure, the S&P 500 Index ($SPX) has fallen sharply overall. But investors are told to “stick with quality.” However, the stock market is now in an era where many stocks move together, I have to question old labels like “value,” “yield,” and “quality.” When the bears come to walk, few, if any, are saved.

The primary reason that high-quality stocks do not rally as expected is not necessarily the failure of the companies themselves, but rather a combination of high initial valuations and an index-specific methodology that sometimes leaves the fund a step behind the fastest growing segments of the market.

SPHQ is a $16 billion ETF. It is highly correlated with the S&P 500.

The chart image looks faint at best. This daily observation indicates a decrease in SPHQ that is greater from beginning to end.

The weekly chart is shown below. And it looks bad to me. When the 20-week moving average (red line) is crossed, it is not a healthy trend. Check out this previous episode, beginning in 2025.

For SPHQ, “quality” is based on three specific fundamental pillars: return on equity, earnings ratio, and financial leverage ratio. By targeting companies with high profitability and low debt, the fund effectively filters for the most stable earners in the S&P 500. However, this focus on financial strength often results in portfolios that are more expensive than the broader market.

A 25x price-earnings ratio means we pay for this quality. And in a market where investors are increasingly sensitive to high multiples and sticky inflation, these quality names can face valuation limits that prevent them from making new moves, even when their underlying earnings are strong.

Another factor that hinders the rally is the specific sector ticket that results in a quality score. The fund currently has a heavy focus on financials, industrials and consumer staples, while losing significant exposure to the mega-cap technology names that have driven the market in recent years. While this pivot was meant to reduce the risk of concentration, it means that SPHQ failed in the final stages of AI-led growth.

Here, the struggle of high-quality stocks in March is also a reflection of the current macro regime. Quality generally increases when growth and bond yields decrease, as investors seek a stable income stream. However, with oil ( CLJ26 ) ( CBK26 ) prices low and geopolitical pressures keeping yields high, SPHQ’s defensive features are set on sentiment from broad risk.

Investors are finding that while these companies are of high quality, they are not immune to global liquidity squeezes. For SPHQ to really take off, the market is likely to see a shift in focus to the stability of interest rates and the strength of fundamental earnings over short-term geopolitical headlines.

I’m not falling for the “quality works over time” thing. The cream will eventually rise. But since I think it’s likely to start at a lower level than that, I’ll pass on it.

Instead, I’ll be looking for signs that maybe, stock by stock, I might recognize some individual names from this quality screen that could make for good entry points later in the year.

Created by Rob Isbitts ROAR ScoreBased on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and build their portfolios. For Rob’s written research, see ETFYourself.com.

As of the date of publication, Rob Asbett had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com