Strengthening Economic Outlook Helps Lift Value ETFs

U.S. markets rose Thursday, with the value style and related exchange traded funds taking charge, after improving labor market data strengthened expectations of a broad economic rebound.

The number of Americans filing for new unemployment claims declined by more than expected last week to a 14-month low of 406,000, while a separate report revealed business spending on equipment picked up as well, Reuters reports. The improving data helped lift cyclical sector and value plays that benefit more from a rebounding economy.

“They want to see the labor market heal so to that extent the May jobs report will be really important, initial claims beating expectations this morning and coming in at a new pandemic low, but the reality is we are still a ways off from where they want to be,” Ross Mayfield, investment strategy analyst at Baird, told Reuters.

“Until the labor market heals the Fed is not going to budge and until the Fed budges it’s kind of a holding pattern,” he added.

Investors have been closely monitoring economic data and potential changes from Federal Reserve officials for signs of rising inflation and how the central bank could shift away from its massive accommodative monetary policy. Fed officials have maintained that they are not ready to adjust the central bank’s monetary support.

“Now that we are moving along with the recovery, we’re dealing with some potential issues that include higher inflation,” Katerina Simonetti, private wealth advisor at Morgan Stanley Private Wealth Management, told the Wall Street Journal. “Even though the Federal Reserve is going with the narrative that it is perhaps temporary in nature and it is post-Covid-recovery driven, it’s still a concern on a lot of investors’ minds.”

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.

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 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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