There are no gurus, only cycles. We have had a prolonged period of this cycle favoring growth tech over value. That will come to an end as it always does. And if you are of the same mindset, the Alpha Architect U.S. Quantitative Value ETF (NASDAQ:QVAL) may be worth considering. QVAL is an actively managed ETF that seeks long-term capital appreciation. It employs a systematic investment approach to select stocks from the U.S. equity market, making it a unique offering in the ETF realm.
The fund focuses on value stocks, specifically identifying and investing in the cheapest, highest-quality value stocks available. This approach leverages the principles of value investing, a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Investors who subscribe to this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company’s long-term fundamentals. This overreaction provides an opportunity to profit by buying when the price is deflated, often referred to as buying on the dip.
QVAL’s investment strategy is systematic and automated. The strategy begins by identifying an initial stock universe of approximately 1,500 U.S. stocks. From this pool, the fund removes outliers and screens for value, leaving an equal-weight portfolio of around 50 stocks. This focused exposure is rebalanced quarterly.
The screening process for value involves identifying stocks that are undervalued compared to their intrinsic worth. This is typically done by examining financial ratios such as Price to Earnings (P/E) and Return on Assets (ROA). The lower these ratios, the more undervalued a stock is considered to be, thus making it a potential candidate for value investing.
Look into QVAL’s Holdings
No position makes up more than 2.25% of the fund overall, and for the most part, the top 5 companies are not necessarily household names – something I like from an investment under the radar perspective.
These holdings reveal QVAL’s propensity for diversification across different sectors, with investments in IT, retail, energy, transportation, and manufacturing industries.
Sector Composition and Weightings
I like the current allocation of sectors overall here, with heavy exposure to Consumer Cyclicals and Energy. Notice Tech makes up just 10% of the portfolio – a big plus in my eyes at this point in the cycle.
Comparing QVAL with Similar ETFs
Since this is active, it’s worth comparing it against a passive proxy like the iShares Core S&P U.S. Value ETF (IUSV). When we look at the price ratio of the two, the results are mixed. There are times when QVAL outperforms, but overall the two funds have performed in-line with each other largely since late 2019.
This isn’t necessarily a bad thing, but it does make considering QVAL perhaps challenging until we see how the fund’s active screening approach works in a cycle where value has a tailwind of outperformance relative to growth.
Pros and Cons of Investing in QVAL
Every investment opportunity comes with its pros and cons, and QVAL is no exception. On the positive side, QVAL offers investors exposure to value stocks in the U.S. market, with a focus on high-quality companies that are trading below their intrinsic value. This strategy can provide significant returns if the market recognizes the stocks’ true value over time.
On the downside, like any investment, QVAL carries risk. The fund’s focus on value stocks means it may underperform in a market that favors growth stocks. Additionally, QVAL’s strategy relies on the accuracy of the quantitative model it uses for stock selection, and any errors in this model could negatively impact performance.
To Invest or Not to Invest?
For those who believe in the principles of value investing and are looking for a systematic, quantitative approach to implementing this strategy, QVAL may be a viable option. With its unique approach to value investing, QVAL is not your typical ETF. I like the concept, even though it’s performed like other passive value funds overall. Still – worth considering and watching when the cycle really does start to favor value overall.