Value stocks and related exchange traded funds rallied on Friday to kick off the new quarter, paring early morning losses as investors turned more risk-on.
Supporting the improved sentiment, Merck & Co Inc revealed positive trial data for its experimental oral drug for COVID-19, molnupiravir.
“As we get more tools and arsenal of ways to make COVID-19 not as sickening and deadly as it is now and not as draconian of a diagnosis, that’s very positive for a return back to ‘normal activity,’” Keith Buchanan, portfolio manager at Globalt Investments, told Reuters.
“This is a huge tool (treatment) that is oral, which is a huge component of it, and that you can pick up at the pharmacy or perhaps even show up in your mailbox days after you get the test positive for the virus,” he added.
Equity markets initially turned lower early Friday after Fitch warned that extended bipartisan brinkmanship over the government’s debt ceiling could threaten the United States’ pristine AAA credit rating.
President Joe Biden has signed a stopgap measure to continue funding the government through Dec. 3, but congressional Democrats and Republicans remained at an impasse over raising the debt ceiling to avert a potentially disastrous U.S. credit default.
“It’s unfortunate when Congress uses this as a negotiating tactic, it’s a bad scenario overall,” Randy Frederick, managing director of trading and derivatives for Schwab Center for Financial Research, told Reuters. “Eventually, foreign creditors might be unwilling to buy U.S. debt and if that happens, rates are going to go sharply higher and if rates shot up because people were unwilling to buy treasuries, that would have a very negative impact on the market.”
ETF investors interested in a targeted approach to the value segment can look to the American Century STOXX U.S. Quality Value ETF (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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