Since different ETF issuers use varying methodologies for
calculating a fund's price-to-earnings ratio, this oft-used
valuation metric is not always as instructive as an individual
stock's. That does not mean ETF P/E ratios are NEVER
instructive.
Quite the contrary. A look back at some ETFs
that looked inexpensive six months ago
shows these funds have been on fire over the past three months.
The cautionary tale is that stocks and ETFs that look cheap on
the basis of P/E can stay that way for extended time frames,
meaning a fund with a low P/E today could be even less
expensive.
That scenario must be acknowledged in the hunt for low P/E
ETFs, but some of the following funds do have the alluring
combination of potential upside at compelling valuations.
iShares FTSE China 25 Index Fund (NYSE:
FXI
)
China is cheap. The problem is it has been for a while and the
second problem is that Chinese equities hovering around perceived
bargain bin levels will not be enough to stem the tide of a third
consecutive yearly decline for the Shanghai Composite.
As of September 28, FXI had a P/E ratio of 12.5 and a
price-to-book ratio of 1.5,
according to iShares data
. Those statistics are enough for most folks to see a "cheap" ETF
in FXI and the ETF is cheaper than the broader emerging markets
universe.
There are two more problems. FXI's most notable superlatives
are that it is the largest and most heavily traded China ETF. It
is far from the best when it comes to performance. Investors
looking to exploit cheap Chinese stocks
have better China ETF options than FXI
.
WisdomTree India Earnings ETF (NYSE:
EPI
)
When it comes to India ETFs, EPI is the anti-FXI. The valuation
is arguably too compelling to ignore and the upside potential is
far greater. WisdomTree rebalanced the India Earnings Index, the
index EPI tracks, in late September and that dragged the index's
P/E down to 8.8.
Indian equities and the corresponding ETFs, EPI included, have
been surging in recent weeks
after the Indian government committed to
reforms
aimed at bolstering the domestic economy and landing increased
foreign direct investment.
"Perhaps the strongest reason to consider Indian equities is
that they are relatively cheap compared to their global
counterparts-especially given India's long-term growth
prospects," WisdomTree Research Director Jeremy Schwartz said in
a research note published today.
"Typically, indexes with lower P/E ratios have fewer growth
prospects,"
Schwartz said
, "But I believe this is not the case for India. Analysts expect
India to have higher long-term earnings growth rates than these
other regions. Given this trade-off of low prices and good growth
prospects, the further boost we have gotten from recent
government reform efforts makes me quite positive on the
prospects for India equities."
SPDR S&P International Telecommunications Sector ETF
(NYSE:
IST
)
Given that IST has just $24.9 million in assets under management
and average daily turnover of 10,440 shares, it is fair to say
many investors are not familiar with this fund. Assets and volume
are not risks here. Rather, IST's primary risk is that nearly a
third of the ETF's weight is allocated to companies based in
Eurozone nations.
Those willing to embrace that risk can get IST at a P/E ratio
of 10.3 and a 30-day yield of 5.33 percent. That compares to the
iShares Dow Jones U.S. Telecommunications Sector Index Fund
(NYSE:
IYZ
) which trades over 40 times earnings with a 30-day SEC yield of
just 2.48 percent.
For more on ETFs, click
here
.
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