ETFs for 3 of the Cheapest Markets in the World

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Overall, 2012 wasn’t that bad of a year for stocks around the world. Despite some major political risks and debt worries, equities in a number of key markets managed to finish the year significantly higher, with many rising by double digits in the time period.

This move higher definitely helped to boost multiples across the board, although many argue that total stock market valuations are still very reasonably priced. In fact, the U.S. is, according to some sources, trading at a forward PE of just 12.9, putting it well below historical highs (see 4 Best ETF Strategies for 2013).

Yet if investors take a global look at market valuations, the U.S. ranks in the middle of the road among the nations studied, suggesting that there are a bunch of better values out there. These markets stretch across the globe and are both developed and emerging, suggesting that investors have a wide range of choices in order to target cheaper markets here in 2013.

Below, we highlight three ETFs that are targeting some of the cheapest markets, by forward PE, in the world today. While some may have some significant risks, any of these could make for interesting values beyond American shores in today’s relatively uncertain market environment, while still taking the broad market approach that comes with ETF investing:

Italy- 9.4x

Italy was in focus for much of 2012 thanks to worries over its bond rates and a sluggish low growth economy. While bonds managed to rebound to close out the year, valuations for Italian securities did not, despite a strong run up in prices in the second half of 2012.

In fact, the iShares MSCI Italy Index (EWI), although it saw significant volatility throughout the year, finished the period up over 20%, easily crushing broad benchmarks in the process. Given that valuations for this market are still lower than any of the other PIIGS markets, or even strong European nations like Germany, it could suggest that the country has a bit more room to run as we head further into 2013 (see Italian Bond ETFs: High Risk, High Reward).

However, investors should note that a continued surge in this Italian ETF won’t just be driven by low bond rates but two key sectors in the economy as well. In particular, energy and financials account for roughly 60% of assets in EWI, so a strong performance in these two could help to pull Italian valuations—and stock prices—a bit higher this year.

South Korea- 8.5x

South Korea’s economy is an interesting one as it is still technically ‘emerging’—at least by some counts—but it is largely driven by developed market issues. Weakness in other markets in the region hasn’t helped, especially in the case of China and Japan, while worries over their North Korean neighbors remain ever-present as well.

These factors have kept South Korean valuations in check, making the country an interesting and lower risk choice heading into 2013. While there are a couple of ways to play the Korean market, easily the most popular is the iShares MSCI Korea Index Fund (EWY).

This product is heavy in IT firms, although consumer discretionary, industrials, and financials, all receive at least 13% of the total as well. In total, the fund has about 106 securities in its basket, and assets over $3.3 billion, making it among the most popular ETF choices for all of Asia (see South Korean ETF Investing 101).

Despite the worries and the low valuation, EWY has actually been a strong performer in the trailing one year period. The fund has added close to 22% in the time frame, largely thanks to an 18.4% surge in the past six months.

Argentina- 4x

2012 was largely a year to forget for the Argentinean economy, as a nationalization of a major oil company in the country spooked markets and diminished the appeal of foreign investment in the South American nation.

Unsurprisingly, this has pushed demand for the main ETF way to track the nation, the Global X FTSE Argentina 20 ETF (ARGT), to a low level, and the price of the fund—and broad stocks in the country-- to an even more depressed mark (read Argentina ETF in Focus on Nationalization Proposal).

In fact, the fund lost nearly 20% in 2012, easily one of the worst performances for the broad South American region, especially with stars like Colombia, Peru, and Mexico setting a strong pace. It remains to be seen if the country can turns things around this year, but the asset profile should at least be some solace to investors.

Consumer staples take the biggest chunk, followed by materials, financials and telecoms, so there is definitely a tilt towards lower risk sectors. Hopefully, this along with the absurdly low valuation for the market can catapult the market back to prominence this year. 

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