Regardless of whether one believes they're heading higher or not, most investors can agree that U.S. stocks are relatively expensive―relative to the past and relative to stocks of other countries.
The trailing 12-month price-to-earnings ratio for the S&P 500 is 21.7, according to FactSet, the highest level since the Great Recession, and much higher than historical averages. For example, over the past 50 years, the S&P 500's trailing P/E ratio has averaged 16.5; over the past 30 years, it has averaged 19.2; and over the past 10 years, it's averaged 17.1.
There are many ways to justify the high valuations of U.S. stocks. The most popular explanations have to do with the fact that interest rates are historically low, and economic growth and corporate earnings are expected to accelerate thanks to the new administration's policies of tax cuts and deregulation.
Low Valuations Hard To Come By In US
For many investors, that's all well and good. They have no problem buying stocks high, expecting them to go even higher.
But for those used to buying stocks on the cheap, there's a dearth of opportunities in the U.S. There might be a few individual stocks here and there that are trading cheaply, but the same can't be said for the indices that make up most stock market funds.
Fortunately, for value-seeking investors, the ETF universe offers easy access to stocks outside the U.S., where, in many cases, P/E ratios are lower. In fact, the list of cheapest ETFs is made up almost exclusively of international funds, and emerging market funds in particular.
There are a few U.S.-focused ETFs with extremely low P/Es―such as the US Global Jets ETF (JETS), with a P/E of 10.8, and the VanEck Vectors Mortgage REIT Income ETF (MORT), with a P/E of 12.3―but they are the exception rather than the rule.
Russia ETFs Cheapest Of All
As cheaply as JETS and MORT are trading, there are more than a dozen other ETFs with even lower price-to-earnings ratios. 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 to their recent earnings.
It's a good starting point for value investors, but it's just the first step in a more comprehensive due diligence process.
Take the iShares MSCI Russia Capped ETF (ERUS). Its P/E of 7.86 gives it the distinction of being the ETF with the lowest price-to-earnings ratio. Concerns about Russia's involvement in Ukraine, Western sanctions and low oil prices have kept pressure on Russian stocks during the past few years.
Some investors also worry about nationalization, where the Russian government takes over companies at the expense of shareholders, as it's done in the past.
Investors unfazed by these concerns have the opportunity to buy Russian stocks at a discount, which could pay off in the long term. In addition to ERUS, the SPDR S&P Russia ETF (RBL), with a P/E of 9.11, and the VanEck Vectors Russia ETF (RSX), with a P/E of 10.03, are two other Russia ETFs trading on the cheap.
Low P/Es For Turkey & China ETFs
As the case of Russia illustrates, there's no free lunch. ETFs that have low P/Es typically do for a reason. It's up to investors to decide whether those low valuations offer a long-term opportunity.
Many of the other cheap ETFs on the market are in the same boat. The iShares MSCI Turkey ETF (TUR) is another name on the list. Political uncertainty following a failed coup last year, credit rating downgrades, rising interest rates and a plunging currency have come together to weigh on Turkish stocks. In turn, TUR currently has a P/E of 8.29.
China is another emerging market country that has fallen out of favor with investors, for a number of well-known reasons. Last year, financial market headlines were dominated by talk of China's economic slowdown.
The Tierra XP Latin America Real Estate ETF (LARE), the Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE) and iShares Europe Developed Real Estate ETF (IFEU) are a few other interesting funds currently trading with low valuations.
For a full list of low-P/E ETFs, see the tables below. Also included is a list of funds with low price-to-book (P/B) ratios, another valuation metric often used by investors.
ETFs With The Lowest P/E Ratios
Source: ETF.com Screener, powered by FactSet
ETFs With The Lowest P/B Ratios
Source: ETF.com Screener, powered by FactSet
Contact Sumit Roy at [email protected]