Value stocks and related exchange-traded funds are leading the broader market this year, and some market watchers believe this could be the start of something more substantial.

This could be good news for the American Century STOXX US Quality Value ETF (NYSEArca: VALQ). VALQ, which follows the iSTOXX^® American century^® USA Quality Value Index, beats the S&P 500 by more than 330 basis points since the beginning of the year, confirming that there is something in the marriage of quality and value.

The VALQ methodology is all the more relevant at a time when the quality factor is significant, value stocks are cheap by standards and interest rates are rising.

“Furthermore, what was already a value investing scenario may even be bolstered by the clear intention of major central banks to respond to rising inflation by raising official interest rates. Such a scenario is generally unfavorable to growth stocks,” specifies BNP Paribas.

As is well known, value stocks trade at discounts to their growth counterparts. However, in this climate, investors should dig deeper and assess things like value spread and value premium.

The concepts are easily accessible, even for novice investors, because the value gap is the valuation gap between value and growth stocks.

“The value premium is the excess return of cheap stocks over glamorous stocks,” adds BNP Paribas. “It’s both larger and far more persistent when measured in sector-neutral terms, i.e. comparing apples to apples by measuring single-sector stock returns. compared to their industry peers.”

There is some merit to industry-independent approaches with value. For its part, VALQ allocates just 5% of its weighting to financial services stocks – arguably the sector most easily associated with value. Through its quality overlay, VALQ devotes a third of its weight to tech and healthcare names, the latter of which is heavily discounted today.

Additionally, deploying the quality of VALQ can help steer investors away from value traps – cheap stocks for a variety of reasons, none of which are likely to be good. The aforementioned spreads further enhance the attractiveness of the fund.

“In our view, as value spreads still have a long way to go, the environment remains particularly favorable for value and multifactor equity strategies,” concludes BNP Paribas.

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