The significant performance of several mega-cap growth stocks buoyed equity markets for much of this year. Amid the rise in stocks, concerns over valuations have many investors looking for more attractively priced companies.
“After a strong run for growth stocks in the first half of 2024, we’re seeing advisors looking to value-based ETFs as an alternative,” explained Todd Rosenbluth, head of research at VettaFi. “Many believe there are attractive stocks that have lagged behind.”
The S&P 500 logged its 30th record close this year as of June 16, reported Bloomberg. However, the breadth of outperformance is increasingly constrained to just the information technology sector. While some investors may focus on valuation concerns within growth, others seek opportunity to capture potentially underpriced companies.
Value investing seeks to capitalize on the outperformance potential of inexpensive stocks. These stocks have the potential to generate better returns than their more expensive peers over time.
A theory as to this outperformance potential is that stocks tend to follow earnings over longer timelines.
“When cheap stocks report higher-than-expected earnings (even versus low expectations), they can outperform as a result of the market’s improved optimism in their earnings potential,” Fidelity explained in a paper.
Targeted Value Investing with Fidelity
The value factor is measured in many ways across a range of strategies. Fidelity Value Factor ETF (FVAL ) seeks to track the Fidelity U.S. Value Factor Index. The Index considers free cash flow yield, forward-looking earnings, tangible book value to price, and EBITDA (earning before interest, tax, depreciation, and amortization) to enterprise value when seeking companies with attractive valuations. It also offers targeted exposure by controlling for unintentional sector or size tilts.
Fidelity seeks to eliminate size and sector bias when constructing its factor strategies. This entails mimicking the weighted average market cap of the original selection universe when the fund rebalances to eliminate small-size bias. It also means mimicking sector weights of the selection universe within the portfolio at each rebalance. This approach reduces unintended bias and allows for better capture of the individual factor.
See also: 3 Key Considerations That Set Fidelity’s Factor ETFs Apart
FVAL also seeks to limit concentration risk within its individual securities. To do so, securities within each sector are overweighted by the same amount instead of simply overweighting the cheapest stocks. This can allow for greater portfolio diversification while working to reduce portfolio concentration.
FVAL is priced competitively, with a management fee of just 0.15%.
Fidelity Investments® is an independent company, unaffiliated with VettaFi. There is no form of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of the content supplied by VettaFi and does not guarantee or assume any responsibility for its content.
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