Published October 10, 2012
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 (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 (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 counterpartsespecially 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 (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 (IYZ) which trades over 40 times earnings with a 30-day SEC yield of just 2.48 percent.
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