Though not to extreme levels, at least not yet, volatility is making its presence felt in the early stages of 2022. However, some market observers argue that sticking with stocks is the proper course of action.
Fundamentals are sturdy, and some market participants believe that equities continue looking attractive relative to bonds. Those factors and more could bode well for select exchange traded funds, include the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ).
“Individual and corporate finances are in solid shape,” says BlackRock. “Fourth-quarter earnings are coming in strong. Through January, 78% of the 172 S&P 500 firms reporting had delivered a positive earnings-per-share surprise. Recent market angst is all about rates and inflation.”
Adding to the case for VALQ is the solid start to 2022 by value stocks. That’s a sign that, at the very least, investors should consider balancing growth and value within their portfolios.
“We’d evaluate current allocations to ensure better balance between the two. The year started with a large rotation into value as the intrinsically longer-duration cash flows of growth companies were threatened by rising interest rates,” adds BlackRock. “Looking out, we see a new world order of higher rates and inflation ― at least relative to the low levels that reigned since the 2008 global financial crisis. This new paradigm should bode well for value and open up an opportunity for underallocations to be addressed.”
VALQ, which tracks the iSTOXX® American Century® USA Quality Value Index, offers investors a unique spin on value investing, as it’s not excessively allocated to the financial services and energy sectors — two staples of traditional value funds. Those sectors combine for just 7% of VALQ’s weight.
Rather, VALQ’s quality mandate leads it to a combined 37% weight to the technology and healthcare sectors, both of which are high quality groups and the latter of which is offering considerable value today.
“Quality stocks have been priced at a discount throughout the economic restart, particularly as investors favored riskier bets that paid off in the early phases of last year’s market upswing. We believe they are poised to rerate higher in the next stage of the cycle. In addition to attractive valuations, our research shows quality stocks have historically outperformed the broader market over the long term while enhancing portfolio resilience,” concludes BlackRock.
Bottom line: At a time when the market is signaling that quality is important, VALQ is a credible idea for investors to evaluate.
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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.