Value Stock ETFs Strengthen as Fed Sees Possible Policy Tightening Ahead

Value stocks and related exchange traded funds climbed on Wednesday after the Federal Reserve indicated that it will start cutting back on bond purchases soon and hike interest rates as soon as next year.

The equity markets have been bouncing back after a precipitous fall-off on Monday on fears of a more widespread contagion from the default risks posed by Chinese property developer Evergrande, but the concerns have since subsided with investors refocusing on the Fed.

In a statement issued after its two-day September meeting, the Fed said that if the economy continues to strengthen broadly as expected, “the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Wall Street Journal reports.

The U.S. central bank cut its short-term benchmark rate to near zero at the start of the COVID-19 pandemic and regularly purchased $120 billion in bonds each month. The accommodative programs, along with aggressive fiscal spending, have been attributed to the sharp turnaround in the stock market over the past year, with the S&P 500 hitting 54 records this year.

The recent volatility and uncertainty, though, could allow for more leeway for the central bank. It would give Fed Chair Jerome Powell “convenient excuses to reiterate his intent to taper, but allow him to fall short of actually committing to a November start to tapering,” Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, told Reuters.

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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