What Stripping the Weakest Stocks From the S&P 500 Actually Does for Your Portfolio

The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is the default core holding for tens of millions of investors. It tracks the S&P 500, charges 0.0945% in expenses, pays a 1.25% dividend yield, and has returned about 314% over the past decade on a price basis. The pitch is simple: own the 500 largest U.S. companies for almost nothing and let market-cap weighting work.

Two funds run a different rule on the same names. The Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ) and the iShares MSCI USA Quality Factor ETF (NYSEARCA:QUAL) keep only the companies that score well on financial strength, the so-called “S&P 500 minus the junk.” The surprise is what that screen has not done: beat the index over ten years. It offers a different exposure, not a higher return.

What SPY Actually Holds

SPY weights its roughly 505 holdings by market capitalization, which concentrates the fund at the top and forces it to carry the bottom regardless of fundamentals. NVIDIA at 7.8%, Apple (NASDAQ:AAPL | AAPL Price Prediction) at 6.8%, and Microsoft (NASDAQ:MSFT) at 4.7% make up nearly a fifth of the fund, and Information Technology is 37% of it. The tail behind them includes companies with negative free cash flow, weak returns on equity, and high leverage. SPY owns them by market value, not financial health. That is the gap a quality screen tries to close.

The Quality Screen, and What It Actually Returned

SPHQ starts with the same S&P 500 universe and keeps only the 100 names that score best on return on equity, accruals, and financial leverage. QUAL applies similar logic across a broader large- and mid-cap universe, screening within each sector to stay roughly sector-neutral.

The numbers are the catch. Over the past ten years, SPY returned about 314%, or 15.49% a year. SPHQ returned about 302%, or 14.91% a year. QUAL returned about 14.27% a year, the lowest of the three. Both quality funds tracked the index closely, and both finished a step behind it. Removing the weakest names did not add return over this stretch. It roughly matched the index while tilting toward financial strength.

So Why Own It

The case for a quality screen is not a higher ten-year number. It is the exposure. These funds concentrate capital in companies with durable returns on capital and clean balance sheets, which tend to hold up better when the earnings cycle turns and weaker businesses get punished. That edge stayed hidden in a decade-long bull market that rewarded almost everything.

There is also a live signal. So far in 2026, SPHQ has pulled ahead of SPY, 13.21% against the index’s 9.64% year to date. One stretch is not a trend, but it is the choppier, more selective market where a quality tilt is meant to earn its keep.

The Tradeoffs to Weigh

The swap is not free. SPHQ and QUAL both charge 0.15% against SPY’s 0.0945%, a gap of about 5.5 basis points, or roughly $55 a year on $100,000. The income is lower too: QUAL yields 0.86% against SPY’s 1.25%, a small haircut for anyone leaning on the portfolio for cash.

They also run more concentrated and pricier. QUAL holds about 44% of its weight in its top ten names and trades near a 28 P/E. That premium drives the strategy in good times and drags when the market rotates toward cheaper, beaten-down names. And do not assume lower risk: over the past decade SPHQ actually ran higher volatility than SPY, so a quality label is not a safety guarantee.

How to Make the Swap

In a tax-advantaged account, the switch is mechanical: sell SPY, buy SPHQ or QUAL, zero tax cost. In a taxable account, the math changes. An investor who bought SPY in 2016 sits on roughly 314% of embedded gain, and a full sale realizes long-term capital gains on all of it. The cleaner path is to stop adding to SPY, route new contributions to the quality fund, and swap inside an IRA first if you hold SPY in both account types.

Where This Leaves the Decision

SPY remains the cheapest, deepest, most liquid way to own the S&P 500, and over the last ten years it also delivered the higher return. A quality screen did not beat it; it tracked the index while tilting toward stronger balance sheets. That makes SPHQ or QUAL a reasonable choice for an investor who wants a quality factor and believes it pays off in a more selective market, not for one expecting a bigger ten-year number. SPHQ is the closer analog to a cleaned-up SPY and is leading in 2026; QUAL is the sector-balanced version. For most investors who simply want the index, SPY is hard to beat.