The quality and value factors are two favored ideas among market observers, though neither is perfect, as highlighted by recent declines against the backdrop of broader market weakness.
Still, the combination of value at a time when broader market valuations are stretched and quality at a time when that’s a highly desirable trait could prove potent for some exchange traded funds, including the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ).
VALQ, which follows the iSTOXX® American Century® USA Quality Value Index, is an enticing idea because for as alluring as they may be, quality and value are two distinct factors, and investors trying to blend those concepts on their own can find the task burdensome. Not all value stocks are quality names, and quality stocks are often pricey.
Add to that, recent declines in the quality space could be opening the door to opportunities for investors considering funds such as VALQ.
“Quality factor ETFs have reset considerably from highs and have one of the most attractive Composite Valuation scores across our coverage. Valuation metrics now trade near long-term averages across the group,” write Bank of America analysts in a recent note.
The $206.21 million VALQ holds 237 stocks and provides exposure to one of the hallmarks of the quality factor: sustainable and growing dividends. Dividend growth is always relevant, but that’s even more true today because even after the Federal Reserve raises interest rates, bond yields will remain low on an absolute basis. Additionally, dividend growth is a valid avenue for beating inflation.
Regarding dividend growth, VALQ allocates 27% of its combined weight to healthcare and consumer staples, which are two groups with storied histories of payout growth. The technology sector, which is an up-and-comer in terms of dividend growth, accounts for 22% of the fund’s roster. Overall, it’s fair to say that the stars are aligning for VALQ in 2022.
“We continue to favor US Quality ETFs as Quality typically outperforms the market as PMIs peak, profit growth slows, and macro volatility increases,” concludes Bank of America. “Risks ranging from higher inflation, a more hawkish Fed, and geopolitical tensions support owning high quality stocks for investors looking to deploy capital amid elevated uncertainty.”
For more news, information, and strategy, visit the Core Strategies Channel.
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.
