Value stocks and related exchange traded funds gained momentum on Thursday as minutes from the Federal Reserve revealed a hawkish tone, further fueling the shift away from growth-heavy names and towards cyclical sectors.
Traders have been rotating out of technology-heavy growth names and into cyclicals, like financials, energy, and industrials, that benefit the most in a high interest rate environment.
“People now are recognizing that rate hikes are coming and the question is just the timing of that,” David Keller, chief market strategist at StockCharts.com, told Reuters. “What we’re seeing so far in early 2022 is a similar sort of environment of elevated volatility, elevated uncertainty, and elevated interest rates, and the reality of what higher rates are going to mean for different sectors.”
Minutes from the Fed’s December meeting revealed that officials were eyeing sooner-than-expected rate hikes and the tapering of its bond-purchasing program to curb elevated inflation levels.
“The hawkish tone of the FOMC (the Federal Open Market Committee) minutes suggests that the central bank is concerned about inflation,” Nancy Davis, founder of Quadratic Capital Management, told Reuters. “We believe the Fed is likely to be more prudent and take longer than the market expects to evaluate the economy before embarking on a swift rate hiking cycle and balance sheet reduction plan.”
ETF investors 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 value measures, 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. It 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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