Value ETFs Proving Durable but Not Perfect | ETF Trends

In terms of stocks, not much is working this year, but investors looking for “significantly less bad” can find just that with value stocks and exchange traded funds.

When keeping things in perspective and realizing upside is hard to come by this year, the American Century Focused Large Cap Value ETF (FLV) is an idea to consider. The value ETF is down 5.24% compared to a loss of 18% for the S&P 500.

FLV is an actively managed fund. Specifically, it’s an actively managed semi-transparent ETF, meaning that its holdings aren’t disclosed on a daily basis as is the case with traditional index-based ETFs. While some investors aren’t familiar with that methodology, FLV is showing that it has merit. The American Century fund attempts to beat the Russell 1000 Value Index, and it’s managing it this year, outpacing that widely observed benchmark by about 540 basis points.

“Investors bracing for further pain in stocks might want to turn to the cheaper corners of the market that have suffered less, but not all value funds are created the same. Generally speaking, large-cap value stocks have held up better than their small-cap brethren this year, as investors bet that larger firms will have more financial resources to better survive a potential recession,” reported Evie Liu for Barron’s.

As mentioned above, FLV is an actively managed fund, and that’s relevant today because the fund’s managers can identify credible value opportunities. That’s important because although price-to-earnings ratios on broader market indexes are declining, that’s more the result of retrenchment by growth stocks. That’s not to say that value indexes are pricey. They’re not, but some are trading at multiples that are close to those of the broader market.

FLV’s active status can also help investors accomplish an important value investing objective: avoiding value traps.

Managers can employ “fundamental measures like profitability, earnings quality and dividend growth. This can help avoid the riskier bets that are cheap for a reason, or the so-called ‘value traps,’” according to Barron’s.

FLV accomplishes that objective by focusing on higher-quality value stocks. Some stocks in this category may legitimately be value names, but that doesn’t mean that they’re high-quality names. Likewise, many value traps overtly lack quality traits, potentially subjecting investors to avoidable risk.

As of the end of April, FLV allocates 47% of its weight to the financial services and healthcare sectors. Consumer staples and industrial stocks combine for another 26%.

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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.