This Active Value ETF Is Poised to Take Off Amid Rising Rates

Value stocks are expected to outperform their growth counterparts in 2022, a year that is forecast to have its economic climate at the mercy of inflation and rising interest rates, further heightened by geopolitical tensions.

Growth companies are typically characterized by expected earnings, and as interest rates increase, many growth stocks’ intrinsic values fall. Value companies, as a group, tend to be more mature and have earnings and margins to improve. While higher rates can negatively affect these companies’ valuations, value stocks have historically proven to hold up better in rising interest rate environments.

A compelling ETF to consider is the ALPS Hillman Active Value ETF (HVAL). HVAL was launched in July 2021 and is managed by subadvisor Hillman Capital Management (HCM), a value equity boutique investment manager with over 25 years of experience.

The fund invests in common stocks of U.S. companies that the subadvisor believes have competitive advantages and have temporarily fallen out of favor for reasons that are considered non-recurring or short-term; whose value is not currently well known; or whose value is not fully recognized by the public, according to regulatory filings.

HCM maintains a proprietary Qualified Investment Universe (“QIU”) consisting of companies that possess certain qualitative characteristics, provided that a company’s market capitalization exceeds $3 billion, according to regulatory filings.

HCM’s QIU is built and maintained by analyzing the following qualitative measures of each company:

  • dominance in a particular industry or niche market;
  • management prowess;
  • strength of pricing and purchasing power;
  • barriers to industry competition and limited substitutes; 
  • limited degree of rivalry amongst competitors;
  • strength of brand or franchise with commensurate brand loyalty;
  • financial flexibility; and
  • quality of products and services.

HCM will also make investments based on certain quantitative measures, which are used to rank the eligible universe. The quantitative measures of a company include:

  • present value of discounted projected cash flows;
  • price-to-book ratio; and
  • price-to-sales ratio.

HVAL skews toward smaller, more value-oriented companies than its average peer in the FactSet U.S. Large Cap Value Segment.

With an expense ratio of 55 basis points, the portfolio maintains a cost advantage over competitors, according to Morningstar.

Other ETFs to consider that offer exposure to U.S. large-cap value stocks include the Vanguard Value ETF (VTV), the iShares Russell 1000 Value ETF (IWD), and the Invesco S&P 500 Pure Value ETF (RPV).

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