ETFs With Global Exposure Offer the Lowest Valuations
For all the hand wringing about rising interest rates and a potential recession, U.S. stocks currently show little signs of worry. After rising more than 17% from its June lows, the S&P 500 is only 10 percentage points from its all-time highs, and U.S. stock market valuations are close to historical averages.
The 12-month trailing price-to-earnings ratio for the stocks in the SPDR S&P 500 ETF Trust (SPY) is currently around 20.7, according to the ETF.com’s stock screener and database. That, according to data compiled by ETF.com, is right around the S&P 500’s 10-year average P/E of 20.3.
The P/E ratio measures the price of a stock divided by its earnings per share (in the case of the S&P 500, the “price” is the index level). It’s a measure of how much investors are willing to pay for each dollar of corporate earnings. The higher the ratio, the more expensive stocks are, and vice versa.
Judging by this single data point, the U.S. stocks today are fairly valued. Corporate earnings are expected to grow 8.9% this year, per FactSet estimates. Analysts project that if the economy can avoid a recession, actual earnings can meet or exceed those levels.
Slim US Pickings for Bargain Hunters
The S&P 500’s P/E ratio of roughly 20 is a solid benchmark for comparing other U.S. ETFs. Naturally, growth stocks, as measured by the Russell 1000 Growth ETF (IWF), are trading at higher valuations—28.8 times earnings.
Value stocks, based on the Russell 1000 Value ETF (IWD), trade at a lower P/E of 17.3x.
Investors looking for bargains won’t find many in the U.S. stock market. In the ETF world, there are only a few U.S.-focused funds with P/E ratios under 10—the iShares U.S. Small Cap Value Factor ETF (SVAL), with a P/E of 9.95; the SPDR S&P Homebuilders ETF (XHB), with a P/E of 9.9; and the First Trust Nasdaq Bank ETF (FTXO), with a P/E of 9.6—but they are the exception rather than the rule.
Bargains Abroad
Instead, most of the bargains are found in the funds that focus on equities outside the U.S. Of the 20 cheapest funds by valuation, the vast majority target international equities and emerging market stocks in particular.
Of course, an ETF with a low P/E ratio doesn't necessarily mean it's a great investment. It simply means most of the stocks in the fund are trading at low prices compared with their recent earnings.
But it is a starting point for value investors to conduct a more comprehensive due diligence process.
Cheapest ETFs Target Developing Countries
Taking the mantle as the ETF with the lowest valuation is the Global X MSCI Pakistan ETF (PAK), with a P/E of just 3.3.
Pakistani stocks have been on a free fall over the past year as the country edges closer to a default on its sovereign debt. The country has been hit particularly hard by the surge in energy and commodity prices. More recently, there’s been hope that the International Monetary Fund could bail out its economy.
Similarly low P/Es exist in ETFs tied to other emerging markets, such as the iShares MSCI Turkey ETF (TUR), the AAM S&P Emerging Markets High Dividend Value ETF (EEMD) and the iShares Emerging Markets Dividend ETF (DVYE), all with P/E ratios between 4 and 5.
Like Pakistan, Turkey has been reeling from economic woes, including inflation that is as high as 80%.
As these emerging market cases illustrate, there's no free lunch. ETFs that have low P/Es typically do so for a reason. It's up to investors to decide whether those low valuations are worth the risks associated with emerging markets and offer a long-term opportunity.
Notable Mentions: Low Valuation, High Yield
While emerging market ETFs make up most of the low P/E list, there are a few other names. The SonicShares Global Shipping ETF (BOAT) is one of those. It holds a global basket of stocks involved in the maritime shipping industry. Like many low-P/E ETFs, BOAT has a hefty distribution yield of 8.3%.
The shipping industry is considered cyclical, so this year’s high earnings might be considered the peak for the companies in the ETF, giving investors little incentive to pay a high multiple for them. It’s a similar story for the VanEck Steel ETF (SLX), which trades with a 4.1 P/E and a 5.6% distribution yield.
To be sure, the P/E ratios are not always useful in determining short-term returns and are better-suited for longer-term strategies.
For a full list of low-P/E ETFs, see the table below. Also included are funds with low price-to-book (P/B) ratios, another valuation metric often used by investors, which measures the price of a fund divided by its book value per share.
ETFs With the Lowest P/E Ratios
Ticker | Fund | AUM | P/E | Distribution Yield |
Global X MSCI Pakistan ETF | $14.92M | 3.28 | 10.73% | |
U.S. Global Sea to Sky Cargo ETF | $6.51M | 3.31 | 7.48% | |
VanEck Russia ETF | $36.79M | 3.5 | 8.70% | |
SonicShares Global Shipping ETF | $24.09M | 3.51 | 8.34% | |
VanEck Steel ETF | $97.37M | 4.05 | 5.58% | |
Invesco International BuyBack Achievers ETF | $93.81M | 4.12 | 3.51% | |
AAM S&P Emerging Markets High Dividend Value ETF | $5.70M | 4.58 | 11.48% | |
iShares MSCI Turkey ETF | $275.22M | 4.69 | 3.44% | |
ProShares Global Listed Private Equity ETF | $14.13M | 4.71 | 5.31% | |
iShares Emerging Markets Dividend ETF | $567.94M | 4.76 | 13.03% | |
First Trust Emerging Markets Small Cap AlphaDEX Fund | $117.63M | 4.79 | 5.88% | |
Global X MSCI SuperDividend Emerging Markets ETF | $61.20M | 5.02 | 10.17% | |
Pacer Emerging Markets Cash Cows 100 ETF | $10.87M | 5.09 | 7.24% | |
Global X MSCI China Financials ETF | $36.67M | 5.21 | 5.62% | |
First Trust RiverFront Dynamic Emerging Markets ETF | $33.89M | 5.25 | 6.41% | |
Global X MSCI Nigeria ETF | $41.98M | 5.27 | 5.05% | |
First Trust Developed Markets ex-US Small Cap AlphaDEX Fund | $7.98M | 5.29 | 3.17% | |
VanEck Egypt Index ETF | $15.21M | 5.33 | 5.11% | |
First Trust Emerging Markets AlphaDEX Fund | $353.36M | 5.34 | 5.24% | |
First Trust Developed Markets ex-US AlphaDEX Fund | $426.61M | 5.51 | 3.44% |
Follow Sumit Roy on Twitter @sumitroy2
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