Time for Value ETFs as Buffett Indicator Signals Caution?

The S&P 500 and the Nasdaq gained for the fifth month in a row in July, and small-cap stocks bounced back on some upbeat economic indicators and cues of cooling inflation. Yet, worries of a market crash have not dispersed.

Warren Buffett’s Warning Signals

Warren Buffett, the legendary investor and a proponent of value investing, has long relied on a market indicator to assess the valuation of U.S. stocks. The Buffett Indicator, as it is called, compares the total market capitalization of all actively traded U.S. stocks to the latest estimate of quarterly GDP, has surged to a worrying 171% as of the latest data, per Business Insider, quoted on Yahoo Finance.

In the past, Buffett suggested that a reading of 100% would signify fair valuations, while levels around 200% would be as good as dancing on edge. Since the current reading is way above 100%, investors should be cautious about the potential of a market crash.

Is Market Entering an AI Bubble?

Investors are increasingly betting on factors like the AI boom, a less-hawkish Fed and a soft landing for the economy. While these factors have contributed to the market’s bullish run, Buffett’s preferred indicator points toward caution. The indicator had shown its merit in the past, notably during the dot-com bubble when it acted as a strong warning of a likely crash.

Fitch Slashes U.S. Credit Rating to AA+

Rating agency Fitch downgraded the United States to AA+ from AAA this week, expecting fiscal deterioration over the next three years and repeated last-minute debt ceiling negotiations that can pressurize the government’s ability to pay its bills.

Fitch initially raised concerns about a potential downgrade in May and continued to support that stance in June after the resolution of the debt ceiling crisis. The agency, however, stated its intention to conclude the review in the third quarter of the current year, per Reuters, quoted on Yahoo Finance.

Why Go for Value ETF Investing?

Given the current market conditions and Buffett’s warning signals, investors may consider adopting a value-oriented approach to their investments. Value investing offers a prudent strategy to navigate stock market volatility.

The style focuses on companies with strong fundamentals that are trading at discounted prices compared to their intrinsic value. By selecting stocks based on their actual worth rather than market speculation, investors can potentially shield their portfolios from overvalued and high-risk stocks.

Agreed, there are some bottlenecks in the Buffett Indicator, for insntance, the gauge takes GDP measurements excluding overseas income, whereas the market capitalizations of U.S. companies consider both domestic and foreign operations.Still, the indicator offers valuable insights into the relative valuation of stocks.

Against this backdrop, below we highlight a few value ETFs that could be played right now.

ETFs in Focus

SPDR Portfolio S&P 500 Value ETF SPYV – Zacks Rank #1 (Strong Buy)

Invesco S&P 500 Enhanced Value ETF SPVU – Zacks Rank #2 (Buy)

iShares MSCI USA Value Factor ETF VLUE – Zacks Rank #2

First Trust Morningstar Dividend Leaders ETF FDL – Zacks Rank #3 (Hold); Yields 4.33% annually.

Urban Outfitters, Inc. (URBN): Free Stock Analysis Report

M.D.C. Holdings, Inc. (MDC): Free Stock Analysis Report

Owens Corning Inc (OC): Free Stock Analysis Report

Boise Cascade, L.L.C. (BCC): Free Stock Analysis Report

North American Construction Group Ltd. (NOA): Free Stock Analysis Report

First Trust Morningstar Dividend Leaders ETF (FDL): ETF Research Reports

iShares MSCI USA Value Factor ETF (VLUE): ETF Research Reports

SPDR Portfolio S&P 500 Value ETF (SPYV): ETF Research Reports

Invesco S&P 500 Enhanced Value ETF (SPVU): ETF Research Reports

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Zacks Investment Research

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