Consider Value ETFs as Inflation Weighs on the Growth Style

Growth stocks are retreating as rising inflation fears weigh on the markets. Exchange traded fund investors can, instead, look to the value style.

The consumer price index surged a higher-than-expected 4.2% in April year-over-year, according to the Labor Department, rising to its highest 12-month level since the summer of 2008, the Wall Street Journal reports.

“That’s starting to get investors a little bit nervous here since we are trading still near all-time highs across the equity market,” Tony Bedikian, head of global markets at Citizens, told the WSJ.

The increase in commodity prices, ongoing supply chain problems and hiring difficulties have fueled expectations of a prolonged increase in consumer prices.

Consequently, many fear the Federal Reserve could hike its target for short-term interest rates sooner than expected, potentially dragging on stocks and other assets that have rallied for over a year on near-zero borrowing costs. Several Fed officials, though, have reassured the markets that the economy still needs support from low rates, and that inflationary pressures may be short-lived.

“The main worry is that…because of inflation moving higher, central banks will start tightening,” Anna Stupnytska, global economist at Fidelity International, told the WSJ.

The rising inflation outlook has weighed on growth stocks as these names are particularly sensitive to higher yields since their value is heavily dependent on earnings far into the future, which are discounted more heavily when yields rise.

Furthermore, these growth names have enjoyed a spectacular recovery since the pandemic began, as investors focused on companies that would benefit the most from the new stay-at-home work environment, which heavily favors technology, communication services, and internet names.

However, as investors look to a broad economic recovery fueled by fiscal stimulus measures, accommodative monetary policies, and more extensive Covid-19 vaccinations, the previously downtrodden value names have begun to pick up momentum.

Investors who are interested in a targeted approach to the value segment can look to the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ). VALQ’s stock selection process includes a value score based on value, earnings yield, and cash flow yield, along with a sustainable income score based on dividend yield, dividend growth, and dividend coverage.

The American Century Focused Large Cap Value ETF (FLV) tries to achieve long-term returns through an investment process that seeks to identify value and minimize volatility. FLV holdings and value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets.

Additionally, the Avantis U.S. Small Cap Value ETF (AVUV), an actively managed ETF, seeks long-term capital appreciation. The fund invests primarily in U.S. small cap companies and is designed to increase expected returns by focusing on firms trading at what are believed to be low valuations with higher profitability ratios.

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