This must-know ETF outperforms the market over the long term

We often hear investors talk about how hard it is to “beat the market” over time, and when it comes to ETFs, they're mostly right. ETFs that outperform broader market indices like the S&P 500 over the long term are rare.

Use of Vanguard S&P 500 ETF (NYSEARCA:VOO) As a proxy for the S&P 500, it's easy to see why. By the end of last month, the fund has delivered enviable total annual returns of 12.8% over the last three years, 11% over the last five years, and 11.9% over the last ten years. Since its inception in 2010, the fund has achieved an annual return of 13.3%.

The Invesco S&P 500 Quality ETF (BATS:SPHQ) is an ETF that also invests in the S&P 500, but with more specific criteria. Let's take a look at whether this is a good investment opportunity and how it compares to the Vanguard S&P 500 ETF, with a focus on long-term performance.

What does the SPHQ ETF do?

SPHQ is a $5.3 billion ETF from Invesco that invests at least 90% of its assets in the S&P 500 Quality Index. This index takes the S&P 500 and invests in the stocks with the highest quality score based on financial metrics such as return on equity, change in net working capital and financial debt.

SPHQ vs. VOO portfolio comparison

SPHQ is fairly diversified with 101 holdings and its top 10 holdings account for 48.5% of the fund. Below you can take a look at SPHQ's top 10 holdings using TipRanks' holdings tool.

VOO has 505 holdings and invests across the entire S&P 500. The top 10 holdings account for 30.4% of the fund. Take a look at VOO's top holdings below.

VOO is significantly more diversified, as it invests in the entire S&P 500 and not just a portion of it, but overall both ETFs are well diversified.

Additionally, as you can see in the tables above, despite their different strategies, there is some overlap between SPHQ and VOO. Both ETFs list Apple and Microsoft among their top 10 holdings.

However, SPHQ has top 10 positions in integrated oil majors like ExxonMobil, payments networks Visa and Mastercard, and consumer staples like Procter & Gamble.

Six of SPHQ's top 10 holdings have a Smart Score of 8 or higher, versus five of the VOOs. The Smart Score is TipRanks' proprietary quantitative stock ranking system. It gives stocks a rating from 1 to 10 based on eight key market factors. The score is data-driven and requires no human intervention. A Smart Score of 8 or higher equates to an Outperform rating.

SPHQ and VOO have identical ETF Smart Scores of 8.

Compare their long-term track record

When you look at an ETF, you want to evaluate its performance over time. SPHQ has a long history of delivering very solid results to its investors. As of the end of May, SPHQ has achieved a 12.4% annual total return over three years, an annual total return of 11.4% over five years, and a annual total return of 12.1% over 10 years. Double-digit returns over the course of a decade are the kind of results that help investors build long-term wealth, making SPHQ an attractive ETF.

Over time, SPHQ's results were comparable to VOO's. Over the past three years, VOO has narrowly outperformed SPHQ for an annualized total return of 12.8%. But over the past five years, SPHQ's 11.4% annualized return is actually slightly better than VOO's 11% return. Over the past 10 years, SPHQ also led VOO by a slim margin of 12.1% to 11.9%, making SPHQ one of the rare ETFs that can say it has “beaten the market” over the long term, albeit with a very narrow lead.

Which ETF has lower fees?

SPHQ has a reasonable expense ratio of 0.15%. That means an investor who puts $10,000 into SPHQ today would pay $15 in management fees in the first year. Assuming the fee stays constant and the fund achieves a 5% annual return, an investor in SPHQ would pay $53 in fees after three years, $99 after five years, and $234 over the course of a decade -Dollar.

These are reasonable fees, especially given SPHQ's double-digit returns. However, VOO returns are comparable and fees are significantly lower. With an expense ratio of 0.03%, a VOO investor would pay only $3 in fees for the first year, $10 for three years, $17 for five years and $39 for the decade. which means significant savings compared to SPHQ.

Snack for investors

Ultimately, SPHQ is one of the few ETFs that can credibly claim to have outperformed the market over the long term, having outperformed a broad S&P 500 fund like VOO over five- and ten-year periods, albeit by a narrow margin.

On the other hand, VOO offers a much lower expense ratio than SPHQ with roughly similar performance.

An investor who invested $10,000 in SPHQ over the past 10 years and achieved a total annual return of 12.1% would now have a position worth approximately $31,337. Meanwhile, an investor investing the same amount in VOO would have $30,782. Both investors would be pretty happy with their returns, but SPHQ has the edge. Remember that past performance is no guarantee of future results. As such, there is no guarantee that SPHQ's strategy will outperform the S&P 500 again over the next decade.

Looking ahead, ETFs currently look a bit different in terms of their current portfolio composition, with VOO having the large-cap tech stocks that dominate the S&P 500 index in terms of market cap, while SPHQ has some of those stocks, some prominent ones however, omits names like Amazon and Tesla.

Overall, these are great ETFs that have helped investors achieve double-digit total returns for years. Owning one of these ETFs has helped investors more than triple the size of their investments over the past 10 years.

Choosing between the two may come down to preference based on current tastes in their portfolios, as detailed above. Conversely, there is no need to pick just one, an investor could invest in both ETFs and likely be happy with their long-term results.


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