As we readjust our investment portfolios for the year ahead, investors should consider value style-oriented exchange traded funds.
With the Federal Reserve tapering its accommodative bond-purchasing program and eying multiple interest rate hikes this year, rising rates will weigh on the growth style, which we are already seeing in the pullback among technology stocks. The higher borrowing costs could weigh on future earnings, which have been the attractive feature for growth stocks in the previous low-yield environment.
However, with a higher rate outlook, investors should begin to shift to value. Bob Leininger, a portfolio manager at Gabelli Funds, anticipates that trend will continue and is focusing more of his portfolio on financials, energy, and aviation stocks that can benefit from a broad economic expansion, Reuters reports.
“The Fed is serious about ending quantitative easing,” Leininger told Reuters. “This is the year that we will start to see quantitative tightening and that will favor value stocks.”
While rate hikes tend to slow down growth, equities have typically increased during rate-hike cycles. For instance, the S&P 500 has advanced at an average annualized rate of 9% over the 12 such rate hike cycles since the 1950s and showed positive returns in 11 of those periods, according to Truist Advisory Services data.
ETF investors 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 value measures, like earnings and the book value of assets.
Lastly, 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. It 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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