Broadly speaking, value stocks are performing admirably to start 2022, and that’s good news for the related exchange traded funds. However, while there are hundreds of value ETFs on the market today, investors should recognize that these products aren’t all cut of the same cloth.
For investors seeking large-cap value exposure, the American Century Focused Large Cap Value ETF (FLV) stands out as a valid consideration. Year-to-date, FLV is topping the the Russell 1000 Value Index — the benchmark that FLV seeks to beat — by about 130 basis points.
“But choosing a value fund isn’t as simple as throwing a dart at this list. Don’t over-rely on a fund’s category placement to tell you everything you need to know; there’s a good deal of variety among strategies in the large-value category,” says Morningstar’s Susan Dziubinski.
FLV’s methodology is relevant to long-term investors. While some passively managed value ETFs simply focus on stocks that are cheap as measured by price-to-book and price-to-earnings ratios, that way of doing things can potentially expose investors to value traps.
Conversely, FLV’s active management not only unearths companies selling at a discount to fair value, it identifies quality stocks. That’s important because when value stocks rallied last year, a lot of “junky” names contributed to that upside. Today, markets are demanding higher quality and profitability, indicating that FLV could be a better, lower-volatility mousetrap for investors seeking value exposure this year.
“Some value funds, for instance, place a greater emphasis on dividend-paying stocks than others. (And not all dividend-seekers are alike. Several favor high-yielding stocks, while many prefer dividend growers carrying lower yields.) Other large-value funds don’t have dividends on the brain–income is secondary, if it’s considered at all. Those preferences can lead to different performance and risk profiles,” adds Dziubinski.
Regarding dividends, FLV yields 1.58%, and several of its top 10 holdings have enviable dividend growth capabilities. On that note, the American Century ETF allocates 64% of its weight to financial services, healthcare, and consumer staples stocks. The latter two sectors are among the most reliable dividend growth groups in the U.S. while financial stocks are resuming payout growth and provide FLV investors with an avenue for capitalizing on rising interest rates.
The $228 million FLV also allocates 12% of its weight to ex-U.S. stocks, introducing some international value to the fund’s proposition.
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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.
