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Yield Curve Inverts: Which Value ETFs Should You Buy Now?

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The bond market continued to offer worrying signals that the U.S. economy could be headed for a recession after U.S. Treasury yields inverted again this week. With the Fed rate hikes likely to be aggressive in the coming days on mounting inflation and uncertainties prevailing due to the Russia-Ukraine war, investors piled into value investing.

Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets, per a Wall Street Journal article. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties. Plus, most value ETFs are financial sector-heavy and perform better in a rising rate environment.

But what would be your stance when yield curve is inverted? Notably, financial stocks have been going through a rough patch with Financial Select Sector SPDR ETF (XLF - Free Report) and SPDR S&P Bank ETF (KBE - Free Report) losing about 3% and 4.1%, respectively, last week (read: Fearing an Inverted Yield Curve? Short Financials With ETFs).

The scenario is same this week also. The yield on the 2-year Treasury yield fell marginally to 2.424%, while the benchmark 10-year Treasury note rose about 4 basis points to 2.412%. The yield on the 5-year government bond went up by 1 basis point to 2.56% on Monday. The scenario indicates that long-term bond yields are at pressure.

As a result, it is better to be choosy now while picking value ETFs. Value ETFs that are less dependent on financials and more focused on other areas like utilities, staples, real estate and energy should do well in the current environment. In fact, information technology is also delivering great results currently due to lower long-term bond yields.

Against this backdrop, below we highlight a few value ETFs that could be beneficial in the current environment.

ETFs in Focus

American Century Focused Large Cap Value ETF (FLV - Free Report)

While Financials take about 25% of the fund weight, Healthcare fetched about 25% too. Consumer Staples and industrials get about 14% and 11%, each, respectively. The fund charges 42 bps in fees.

iShares Russell Mid-Cap Value ETF (IWS - Free Report)

The fund gives exposure to mid-sized U.S. companies that are thought to be undervalued by the market relative to comparable companies. The fund charges 23 bps in fees. Financials get only 16.3% while Industrials (14%) and Real Estate (11.64%) receive the next two spots. Information Technology gets about 9.33% of the ETF IWS.

ALPS Hillman Active Value ETF (HVAL - Free Report)

The fund looks to invest in companies that have sustainable competitive advantages, at times when we calculate that their stocks are undervalued. Financials do not have much weight here with healthcare, communication services, costumer staples and industrials taking the top four spots and double-digit weights.

iShares Factors US Value Style ETF (STLV - Free Report)

The underlying Russell US Large Cap Factors Value Style Index selects equity securities from the Russell 1000 Value Index with exposure to momentum, quality, value, size, and low volatility while maintaining a level of risk similar to that of the Russell 1000 Value Index. Financials have 23% weight in the fund, but Health Care (16.80%), Information Technology (10.97%) and Consumer Staples (10.24%) also possess decent weights.

SPDR S&P 400 Mid Cap Value ETF (MDYV - Free Report)

The underlying S&P MidCap 400 Value Index measures the performance of the mid-capitalization value sector in the U.S. equity market. Industrials (19.26%), Consumer Discretionary (12.83%), Real Estate (11.37%) and Information Technology (10.29%) have a double-digit weight in the fund, while financials take about 16.92% of the fund weight.