Value equities and the related exchange traded funds are topping the broader market this year, and some market observers believe that could be the start of something more substantial.
That could be good news for the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ). VALQ, which follows the iSTOXX® American Century® USA Quality Value Index, is beating the S&P 500 by more than 330 basis points year-to-date, confirming that there’s something to the marriage of quality and value.
The VALQ methodology is all the more relevant at a time when the quality factor is meaningful, value stocks are inexpensive relative to norms, and interest rates are rising.
“Moreover, what was already a favourable value investing scenario may even be reinforced by the manifest intention among leading central banks to respond to rising inflation by raising official interest rates. Such a scenario is typically unfavourable for growth stocks,” says BNP Paribas.
As is widely known, value stocks trade at discounts relative to growth counterparts. However, in this climate, investors should dig deeper and assess elements such as the value spread and the value premium.
The concepts are easily approachable for even novice investors, as the value spread is the valuation gap between value and growth equites.
“The value premium is the excess return of cheap stocks relative to glamour stocks,” adds BNP Paribas. “This is both larger and significantly more persistent when measured in sector-neutral terms, i.e. comparing apples with apples by measuring the returns of stocks in a single sector relative to those of their sector peers.”
There’s some merit to sector-agnostic approaches with value. For its part, VALQ allocates just 5% of its weight to financial services stocks — arguably the sector most readily associated with value. By way of its quality overlay, VALQ devotes a third of its weight to technology and healthcare names, the latter of which is deeply discounted today.
Additionally, VALQ’s deployment of quality can help steer investors away from value traps — stocks that are inexpensive for a variety of reasons, none of which are likely to be good. Further enhancing the allure of the fund are the aforementioned spreads.
“In our view, since value spreads still have a long way to compress, the environment remains particularly favourable for value and multi-factor equity strategies,” concludes BNP Paribas.
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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.