American Century STOXX U.S. Quality Value ETF: A Fund Methodology That Adds Value

Summary

• Given its favorable allocation relative to the benchmark, VALQ appears well positioned to capture more upside with lower risk.
• VALQ’s holdings generate quality cash flows and have cheaper valuations compared to IUSV and SPY.
• VALQ’s 0.32% total annual costs (TAC) are below the average of the 50 All Cap Value style ETFs under coverage.

Identifying a fund that holds quality companies at cheap valuations is not easy, especially in the meme stock-driven market of late. The American Century STOXX U.S. Quality Value ETF (NYSEARCA:VALQ) follows a methodology that leads it to allocate heavily to Attractive-or-better rated stocks and is this week’s Long Idea. VALQ is our best All Cap Value style ETF for 1Q21 and ranks first overall among all of our style ETFs in 1Q21[1].

Our Research Looks Forward, Not Backward

VALQ has annualized returns of ~6% over the past three years compared to ~9% for its benchmark, as measured by iShares Core S&P U.S. Value ETF (IUSV). This underperformance drives Morningstar’s backward-looking rating system to rate VALQ below IUSV.

Looking forward instead of backward, we assign VALQ our highest rating: Very Attractive (equivalent to 5 stars). We base our forward-looking Predictive Fund Ratings on in-depth analysis of fund holdings. Relying only on backward-looking ratings could mislead investors into choosing IUSV when more in-depth, holdings-based research shows VALQ has superior risk/reward.

Figure 1: American Century STOXX U.S. Quality Value ETF

Sources: New Constructs, LLC, company filings, and Morningstar

To properly evaluate any ETF, including VALQ, one must analyze the filings, including the footnotes and MD&A, of each of its holdings. This diligence takes an enormous amount of time unavailable to most without the aid of technology. We leverage our Robo-Analyst technology to provide more reliable fundamental data, proven by The Journal of Financial Economics.

Holdings Research Reveals a Good Strategy

According to VALQ’s prospectus, the fund seeks to select stocks of large- and mid-cap companies within the STOXX USA 900 Index that are “undervalued or have sustainable income.”

To identify quality companies, the fund uses “measures of profitability, earnings quality, management quality and earnings estimate revisions” to eliminate bottom performers. The fund also looks at “efficient use of capital” to assess

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.