Ditch Dividend Funds for These 3 High-Quality ETFs


  • These three high-quality ETFs are worthy of your investment.
  • Nuveen Growth Opportunities (NUGO): The ETF demonstrates why active management can be successful.  
  • Invesco S&P 500 Quality ETF (SPHQ): It is the S&P 500 on steroids. 
  • American Century US Quality Growth ETF (QGRO): It has a slightly different composition of large-cap and mid-cap stocks. 
high-quality ETFs - Ditch Dividend Funds for These 3 High-Quality ETFs

Source: shutterstock.com/ex_artist

If you want to own high-quality ETFs, a recent article from Morningstar.com suggested you should avoid dividend-focused funds.  

Larry Swedroe discussed why dividends are an inefficient way to return capital to shareholders. The veteran investing expert concluded that a focus on dividends is not likely to add value. Quality might. 

“The bottom line is that dividend-growth strategies are basically quality strategies. The good news about the quality factor is that the premium (about 4.8% a year since 1958) has been persistent and pervasive around the globe,” Swedroe stated.

I’ve long felt that dividend stocks are overrated investments. As Swedroe points out, good performance isn’t derived from dividends themselves but from quality factors such as profitability, sales growth, etc. 

So, if you want to own high-quality ETFs, don’t focus on dividends with your choices. Here are three to get you started that focus on quality.  

Nuveen Growth Opportunities (NUGO)

Business man using computer hand close up futuristic cyber space decentralized finance coding background, business data analytics programming online VPN network metaverse digital world technology. tech stocks
Source: thinkhubstudio / Shutterstock.com

Nuveen Growth Opportunities (NYSEARCA:NUGO) is an actively managed ETF with $2.8 billion in net assets. 

NUGO’s website states, “Fund seeks long-term capital appreciation through a concentrated growth portfolio that primarily invests in U.S. companies with market capitalizations of at least $1 billion. The investment team looks for high-quality companies that exhibit potential for attractive earnings growth, strong relative valuation, attractive cash flows, and significant long-term returns.”

The ETF is relatively focused, with just 43 holdings. Its top three positions by weight are Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Amazon (NASDAQ:AMZN). Together, they account for 33.4%. 

The top three sectors by weight are technology (47.44%), consumer discretionary (14.07%), and communication services (11.99%). 

Launched less than three years ago in September 2021, it’s working on a second consecutive year of gains, up more than 12%, following a 45.4% gain in 2023.     

Invesco S&P 500 Quality ETF (SPHQ)

The Standard & Poor's 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. SPY stock follows the exchange.
Source: Pavel Ignatov / Shutterstock.com

Morningstar gives Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ) a five-star rating. It has $8.6 billion in net assets and charges 0.15%.

SPHQ tracks the performance of the S&P 500 Quality Index, which is reconstituted and rebalanced on the third Friday in June and December. 

The index uses three financial metrics to derive a quality score for all the companies in the S&P 500: Return on equity, accruals ratio, and financial leverage ratio. You can find the definitions for each in the summary prospectus.  

From the 503 stocks in the parent index, it selects the top 100 quality scores. They are weighted based on the quality score multiplied by the market capitalization. As of June 30, 2023, the size of companies ranged from $8.11 billion to $3.05 billion, with large caps accounting for 89% of its net assets and the remaining 11% in mid-caps.

The top three sectors by weight are technology (33.66%), health care (13.74%), and industrials (10.98%). The top 10 holdings — effectively, the ones with the highest quality — account for 47% of the portfolio.  

It has a 15-year annualized total return of 14.91%.

American Century US Quality Growth ETF (QGRO)

Creative image of growing coin stacks and candlestick forex chart on blurry background. Trade, money and financial growth concept. Growth stocks. Double exposure
Source: Golden Dayz / Shutterstock.com

As the ETF’s website states, the American Century US Quality Growth ETF (NYSEARCA:QGRO) “seeks to capture the performance of large- and mid-capitalization companies in the U.S. that possess attractive quality, growth, and valuation fundamentals.”

Launched in September 2018, it tracks the performance of the American Century U.S. Quality Growth Index, a collection of high-quality, high-growth companies. 

The index’s selection process starts with 1,000 large-cap and mid-cap companies in the S-Network US Equity Large/Mid-Cap 1000 Index. It then generates a growth score based on several growth-related metrics. The summary prospectus provides more information.     

The index comprises 150-250 stocks with the highest growth scores. The stocks included have a market cap of $1.3 billion or higher. 

The top three sectors by weight are technology (36%), consumer discretionary (19%), and industrials (15%). The top 10 holdings account for just 25.29% of the $887 million in net assets. However, you’ll see that the names in the top 10 and their weightings are noticeably different from NUGO or QGRO. 

That makes it a good consolation pick.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

Article printed from InvestorPlace Media, https://investorplace.com/2024/04/ditch-dividend-funds-for-these-3-high-quality-etfs/.

©2024 InvestorPlace Media, LLC