Prediction: This Lesser-Known ETF Will Be the Best Bear Market Buy

Morningstar has stated that this ETF's holdings should "help it stay afloat during bear markets." However, most investors have never heard of this fund, even though it holds only stocks from the popular S&P 500.

The Invesco S&P 500 Quality ETF (NYSEMKT: SPHQ) focuses on the highest-quality stocks in the S&P 500 Index (SNPINDEX: ^GSPC), making it a more defensive holding. That focus on quality over quantity leads me to predict it will be the best ETF to buy during a bear market for those seeking a less volatile holding.

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The highest quality stocks

The S&P 500 holds the 500 largest publicly traded companies weighted by market cap. With many of the biggest tech companies growing significantly over the past decade, the broad market index is at its most concentrated level since 1965. Its 10 largest holdings comprise nearly 40% of its value.

The Invesco S&P 500 Quality ETF takes that same pool and screens for companies with the highest quality score. This metric focuses on three fundamental measurements: return on equity, accruals ratio, and financial leverage ratio. The fund rebalances and reconstitutes its holdings twice a year, ensuring it holds 100 of the highest quality S&P 500 members.

The ETF currently holds 99 stocks. While it still has a heavy concentration among its 10 largest holdings (43.4% on 99 holdings, not 500), its top 10 is much less tech-heavy. This group also features Mastercard, Visa, GE Vernova, Costco, and GE Aerospace.

Bear market performance

Morningstar notes that the Invesco S&P 500 Quality ETF focuses on large, profitable companies, which gives it a more defensive posture and makes it less volatile during bear markets. We saw that during the 2022 rate-hike bear market, the fund outperformed the S&P 500, with the ETF declining 17.3% compared to the broader market index's 19.4% slump. With less tech concentration at the top these days and higher overall quality, I'd expect this ETF to deliver even wider outperformance relative to the S&P 500 if we were to endure an AI-driven bear market.

However, it is worth noting that the ETF still has a relatively high tech concentration, at 35.8%. That's only slightly less than the S&P 500 at 37.9%. It just shows the high quality of tech stocks these days, as reflected in their financial metrics. While a bear market would likely drive down tech stock valuations, bear-market survivability would be much less of a concern than it was in the dot-com bust or during the financial crisis.

Consider focusing on quality over quantity during the next bear market

The S&P 500 provides exposure to the 500 largest companies, weighted by market cap. The Invesco S&P 500 Quality ETF narrows the field to the 100 or so highest-quality large companies and gives more weight to their financial quality than to market cap. That leads me to predict it will outperform the S&P 500 during the next bear market, making it an ideal fund to buy whenever the market starts to look shaky.

Matt DiLallo has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Costco Wholesale, GE Aerospace, GE Vernova, Mastercard, and Visa. The Motley Fool has a disclosure policy.