Value stocks are showing plenty of mettle this year, and that could compel investors to evaluate exchange traded funds like the the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ).
Up 3.58% over the past week, VALQ is beating the S&P 500 by about 430 basis points year-to-date. With value stocks proving durable, VALQ’s first-quarter performance could prove to be more floor than ceiling as 2022 moves along.
“Valuation metrics also make value’s leadership look sustainable for 2022. Value stocks have been consistently cheap this cycle, relative to history. Even after the recent correction, the S&P 500’s least-expensive quartile trades at a historically extreme discount to its median stock, based on forward earnings yield,” says Denise Chisolm, Fidelity director of quantitative market strategy.
VALQ, which follows the iSTOXX® American Century® USA Quality Value Index, is a worthwhile consideration for value investors in this environment because it’s one of just a small number of funds in this category that blend quality and value. That’s something to ponder because some inexpensive stocks attain that status while lacking quality traits, and those are names that investors ought to avoid.
Indeed, the $221 VALQ’s approach to value is unique, and it makes clear the fund’s quality purview. For example the energy and financial services sectors, which are usually hallmarks of traditional value ETFs, combine for just 8% of VALQ’s roster.
The lack of financial services exposure doesn’t necessarily mean that VALQ can’t benefit from the Federal Reserve’s recently commenced rate tightening regime.
“Investors who worry about the impact rate increases will have on stocks may want to look to value for protection. Value factors across the board have tended to outperform the market following Fed rate hikes,” the Fidelity strategist says. “The likely reason: Rate increases usually reflect strong economic growth, which can improve the prospects of beaten-down companies with improving earnings.”
The American Century ETF allocates 33% of its combined weight to technology and healthcare stocks. Not only does that confirm the fund’s quality elements, but those allocations can help position investors to capitalize on earnings growth and quality, which are meaningful traits against the backdrop of rising interest rates.
Additionally, VALQ is worth a look today because value stocks are indeed inexpensive, and that’s significant from a historic perspective.
“Value stocks have outperformed the market more than two-thirds of the time from comparable relative valuations in the past, with average outperformance of 12%,” adds Chisolm.
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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.
