In times of high inflation and low returns, equity investors often turn toward value stocks and value investing.
High inflation is here: U.S. suppliers upped their prices last month after reducing them the previous two months. The Producer Price Index, which gauges the prices that suppliers charge businesses, increased 0.4% in September, the U.S. Bureau of Labor Statistics reported Wednesday.
On an unadjusted basis, the index for final demand advanced by 8.5% for the 12 months ended in September. This increase comes after prices declined 0.2% in August and 0.4% in July.
While this doesn’t directly affect consumer-level inflation, it can eventually — and indirectly — influence it since businesses ultimately pass their costs onto their customers. So, investors are looking for indications that high inflation is easing.
Investors are also looking for signs of how the Federal Reserve will move forward with interest rate hikes. If high inflation persists, the Fed will likely continue raising interest rates. If it’s easing, perhaps the U.S. central bank will lift its proverbial foot off the gas.
Investors seeking a targeted approach to value stock investing may want to consider the American Century STOXX U.S. Quality Value ETF (NYSE Arca: VALQ) or the American Century Focused Large Cap Value ETF (FLV).
VALQ tracks the iSTOXX® American Century® USA Quality Value Index, which tries to identify undervalued large-cap companies with stronger financial fundamentals relative to rivals. The index screens stocks based on value, quality, and income. Its top three holdings as of Oct. 11 were Pfizer Inc. (weighted at 2.26%), Walgreens Boots Alliance Inc. (1.99%), and Gilead Sciences Inc. (1.88%).
Meanwhile, according to management, FLV is an actively managed ETF that seeks large-cap companies selling at a discount to fair value. FLV, which aims to beat the Russell 1000 Value Index, mixes cyclical sectors (like financials) with defensive (including communication services, consumer staples, healthcare, real estate, and utilities). The fund recently held 52 stocks, with top positions in Allstate, Johnson & Johnson, Medtronic, Unilever, and Verizon Communications.
“Value securities had been more attractively valued, tend to offer higher dividend yields (which helps contribute to their shorter duration profile than growth stocks where most of the return is due to price appreciation) and have recently experienced stronger momentum vs. growth,” said Sandra Testani, vice president of ETF product and strategy for American Century Investments.
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