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Analyzing American Century’s Quality Value ETF

This article was originally published on ETFTrends.com.

Earlier this year, American Century entered the ETF arena with a pair of funds, one of which is the American Century STOXX U.S. Quality Value ETF (VALQ) .

VALQ tracks the performance of the iSTOXX American Century USA Quality Value Index, which is made up of 900 largest publicly traded U.S. equity securities screened and weighted by fundamental measures of quality, value and income.

Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.

“VALQ’s index allocates dynamically between two distinct subindexes: the iSTOXX American Century USA Value Index and the iSTOXX American Century USA Income Index,” said Morningstar in a recent note. “The former scores stocks based on various quality and value measures. Stocks ranking in the bottom 20% of the universe or their supersector based on their composite quality/value scores are tossed out.”

More On VALQ's Methodology

VALQ also examines stocks' quality characteristics. Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar.

Related: Top ETF Plays As Small-Caps Outpace Large-Caps

The ETF holds 246 stocks with a weighted average market capitalization of $77.95 billion (as of the end of April). Many value strategies are heavily allocated to the energy or financial services sectors, but those sectors combine for just 15% of VALQ's weight. Rather, the American Century ETF devotes 20% of its weight to technology stocks and a combined 27% to the healthcare and consumer discretionary sectors.

“VALQ’s subindexes apply a variety of stock- and sector-level constraints based on active exposure versus the parent index and different measures of fundamentals and volatility,” according to Morningstar.

As the research firm notes, VALQ currently tilts toward smaller, less expensive stocks, but as market conditions change, the fund's dynamic allocation model can re-allocate toward larger quality fare.

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