There are dozens of exchange traded funds based on value strategies. One of the newest members of the field is the American Century STOXX U.S. Quality Value ETF (NYSE: VALQ), which debuted in January.
VALQ tracks the iSTOXX American Century USA Quality Value Index. The benchmark screens the 900 largest domestic companies based on factors including income, quality and value.
VALQ's underlying index allocates from two other indexes: the iSTOXX American Century USA Value Index and the iSTOXX American Century USA Income Index.
“The former scores stocks based on various quality and value measures. Stocks ranking in the bottom 20 percent of the universe or their supersector based on their composite quality/value scores are tossed out,” Morningstar said in a recent note.
The remaining equities are screened by an optimizer, and roughly 200-300 stocks are left once VALQ's criteria are applied, Morningstar said.
"The income index uses the same quality scores and a variety of dividend growth and sustainability metrics to choose stocks. After stocks are scored, they are run through an optimizer. The resulting portfolio will contain 75–100 stocks.”
At its core, VALQ's index geared toward companies with sustainable income and sound fundamentals that trade at attractive valuations.
Why It's Important
For much of the current U.S. bull market, value has been trailing growth and momentum, but that has not stopped some market observers from calling for the value factor's resurgence.
Many traditional value funds are heavily allocated to the energy or financial services sectors or both. In VALQ's case, the fund devotes just 15 percent of its combined weight to those sectors. VALQ's 20-percent technology weight — its largest sector exposure — is refreshing among value ETFs. Consumer discretionary and health care stocks combine for 27 percent of the fund's roster.
VALQ tilts toward smaller, inexpensive companies.
“At present, it favors smaller, less-expensive stocks. As market conditions evolve, there will be times when it will tilt toward larger, higher-quality stocks," according to Morningstar.
Obviously, VALQ is positioned for a return to the value factor, but with the FAANG stocks continuing to climb, value's rebound could be on hold. The fund's emphasis on reliable dividend payers could make it an attractive alternative for investors who are seeking added income.
VALQ charges 0.29 percent per year, or $29 on a $10,000 investment.
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