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Is Market Overvalued? 5 Cheap Top-Ranked ETFs to Play

Sanghamitra Saha

U.S. markets have seen a great start to 2019, thanks to a dovish Fed and U.S.-China trade optimism. The S&P 500 has recovered sharply this year from the Christmas lull and has touched 2,800 for the first time in nearly four months. The index also recorded its ninth weekly gain in the last 10 weeks. And the Dow Jones hit its 26,000 mark in late February for the first time since Nov 9.

The S&P 500 returned 3.0% in February on top of 7.9% in January. This helps the key equity gauge to log the fifth largest gain to start a year in the history of the S&P 500 and the best start since 1987.

Are Stocks Overvalued?

After the astounding gains, thoughts of a correction in the market or overvaluation concerns are justified. This is especially true given that stocks have become 17% pricier in the last two months while profits are fading.

Analysts’ earnings estimates for Q1 and Q2 of 2019 are declining. The consensus estimate for  earnings is now likely to decline 2.7% for Q1, and rise just 0.7% for the June quarter, “representing a downward swing of 4.2 points in the outlook since the start of the year,” per an article published on Fortune.  

Analysts are deducing operating EPS, which is normally around 15% lower than the GAAP. The blend of declining earnings projections and the S&P’s two-month jump has boosted the forward P/E from 15.1x at the start of the year to 17.7x right now, per some analysts.

Meanwhile, global growth worries remain rife. Most of the developed economies, especially in Europe and some emerging economies, have been suffering from a slowdown. Though there were signs of improvement in 2019, U.S.-China trade tensions are not resolved yet. Even if the duo manages to strike a deal, the hope is currently priced in at the current level. Some analysts are of the view that any real deal appears a 'sell the news' opportunity for investors right now.

Time to Have a Look at Low P/E ETFs?

Having said this, we would like to note that the Fed is acting dovish and this should give some warmth to equity investing in the near term. Investors can thus definitely tap for top-ranked ETFs that have P/E (36 months) lower than the S&P 500 (16.43x).

US Global Jets ETF (JETS) – P/E 9.9x

The fund looks to track the performance of Airline Companies across the globe with an emphasis on domestic passenger airlines, Demand has been good. Load factors or capacity utilization are hovering at near record levels, per an article published on barrons.com (read: Airlines ETF Riding High on Q4 Earnings).

iShares Edge MSCI USA Value Factor ETF VLUE – P/E 11.32x

If you think the market is overvalued, you can bank on this value ETF. The fund gives exposure to stocks with value characteristics and relatively lower valuations.

Vanguard Total World Stock ETF VT – P/E 13.90x

As most of the central banks of the developed economies have been turning dovish this year, this world ETF may benefit. The fund has highest exposure (57.20%) to North America (read: Vanguard Intensifies ETF Fee War Again).  

John Hancock Multifactor Industrials ETFJHMI – P/E 15.80x

The industrial sector would benefit should there be any improvement in the U.S.-China trade relation. The Chinese are also offering stimulus to the manufacturing sector by cutting taxes and making credit more available. The fund follows an index, which selects stocks based on sources of expected returns. Securities included in the index are classified according to their market capitalization, relative price, and profitability, and are weighted accordingly in favor of smaller, less expensive, more profitable companies.

Schwab US Dividend Equity ETF (SCHD) – P/E 14.69x

In a bid to safety, a look at dividend-focused quality ETFs makes sense. The fund SCHD measures the performance of high dividend yielding U.S. stocks that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. It charges 2.78% annually (read: A Dividend ETF Investing Guide).

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