Time for Value ETFs as March Rate Cut Unlikely?
Wall Street recorded declines on Wednesday, reacting to the Federal Reserve's decision to maintain current interest rates. This decision, coupled with Federal Reserve Chair Jerome Powell's indications that rate cuts are unlikely in the near future, particularly in March, triggered a negative response from investors. The Fed seek more evidence of declining inflation before any rate cuts are considered.
The S&P 500 lost more than 1.6% on Jan 31, 2024. The Dow Jones Industrial Average shed about 0.8% and the tech-heavy Nasdaq-100 added about 2% on Jan 31, 2024. This downturn marked the S&P 500's worst single-day performance since September, per a Yahoo Finance article.
March Interest Rate Cut Unlikely
During a press conference, Jerome Powell moderated expectations for a rate cut in March. He suggested that the Federal Reserve is unlikely to have enough confidence in falling inflation by the March meeting to consider a rate cut. This cautious stance led to a downbeat investor expectations, with the probability of a March rate cut, as per the CME FedWatch Tool, declining meaningfully from over 60% prior to the meeting to just about 36%.
Disappointing Tech Earnings Worsen Weak Market Sentiments
The market's rough start was further intensified by underwhelming earnings reports from major tech companies. Notably, Microsoft MSFT, Alphabet (GOOGL, GOOG), and AMD AMD, often referred to as the "Magnificent Seven," were at the forefront of these disappointing results.
Alphabet's 7.5% decline was particularly notable, leading the losses among these tech giants. The lackluster performance from these leading companies casts a shadow over the earnings season, with investors awaiting reports from other tech mega-caps like Apple AAPL, Amazon AMZN, and Meta META.
Why Value?
Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a high interest rate scenario and a rise in long-term yields cuts the present value of companies’ future earnings.
And this is where value investing rises. Value stocks perform better in a rising rate environment. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation. Plus, downbeat earnings of a few technology behemoths may weigh on the tech-heavy Nasdaq ETF investing.
Growth stocks staged a comeback this year on hopes of a less-hawkish Fed. In comparison, value ETFs underperformed. But value ETFs are available at dirt-cheap valuation currently. SPDR Portfolio S&P 500 Value ETF SPYV has a P/E ratio of 16.16X while SPDR Portfolio S&P 500 Growth ETF SPYG has a P/E ratio of 19.67X.
Below we have highlighted a few value ETFs that are cheap and may make a rebound if growth stocks’ rally falters and slowdown worries hit the global economy hard. These ETFs have a lower P/E than the S&P 500 ETF (SPY), i.e., 17.86X.
ETFs in Focus
American Century U.S. Quality Value ETF VALQ – 12.39X; Up 3.3% YTD
Invesco Large Cap Value ETF PWV – 12.39X; Up 3.1% YTD
Columbia Research Enhanced Value ETF REVS – 12.77X; Up 2.6% YTD
Invesco S&P 500 Enhanced Value ETF SPVU – 8.21X; Up 2.4% YTD
iShares Morningstar Value ETF (ILCV) – 14.82X; UP 2% YTD
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Alphabet Inc. (GOOG) : Free Stock Analysis Report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Invesco Large Cap Value ETF (PWV): ETF Research Reports
SPDR Portfolio S&P 500 Growth ETF (SPYG): ETF Research Reports
SPDR Portfolio S&P 500 Value ETF (SPYV): ETF Research Reports
Invesco S&P 500 Enhanced Value ETF (SPVU): ETF Research Reports
VictoryShares US Value Momentum ETF (ULVM): ETF Research Reports
American Century U.S. Quality Value ETF (VALQ): ETF Research Reports
Columbia Research Enhanced Value ETF (REVS): ETF Research Reports
iShares Morningstar Value ETF (ILCV): ETF Research Reports
Meta Platforms, Inc. (META) : Free Stock Analysis Report
