The value factor is taking its lumps again this year, but a new fund in a new fund structure could allay advisors’ concerns about deploying value equities in client portfolios.
Enter the Focused Large Cap Value ETF (FLV). The Focused Large Cap Value ETF tries to achieve long-term returns through an investment process that seeks to identify value and minimize volatility. The fund is one of the actively managed non-transparent ETFs launched by American Century earlier this year.
FLV includes companies attractively priced relative to their fair value and potential downside. Additionally, the management team incorporates fundamental research and downside analysis to manage risk, and dampen volatility, which should establish a risk/return profile for each stock helps lead to a higher probability of long-term outperformance.
Differences between ANTs relative to basic ETFs ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance.
Good Idea, Right Time
FLV could prove to be a well-timed launch because the growth/value gap is wide by historical standards, which could portend a rebound for the latter.
Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.
American Century ANTs, including FLV, use Precidian’s ActiveShares structure.
The Precidian semi-transparent active ETFs are slightly different from the ETFs we have all come to know. Looking at the creation and redemption process for ETF shares, ActiveShares comes with a basket for underlying securities available only to a designated authorized participant representative who delivers pro-rata or a proportional slice of the portfolio. The in-kind creations and redemptions process is effected through this AP-owned confidential account, which helps active managers protect their secret sauce from the public but still allows the ETF trade relatively in line with its underlying assets. The semi-transparent ETFs would then publish its holdings every quarter.
For more on active strategies, visit our Active ETFs Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.