For all the hand wringing about trade wars and a potential recession, U.S. stocks don’t reflect that worry. The S&P 500 is only a few 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 (P/E) for the S&P 500 is currently around 21.4, close to the 10-year average of 21.6.
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, U.S. today stocks are fairly valued. Corporate earnings are close to flat from last year, but if the economy can avoid a recession, hopes are that profits can start growing again in 2020.
Slim US Pickings For Bargain Hunters
Though the S&P 500 is trading close to historical valuations, certain areas of the market are running much hotter. Growth stocks, as measured by the Russell 1000 Growth Index, are trading at 27.6 times earnings, more than 20% above the 10-year average.
Even value stocks, based on the Russell 1000 Value Index, are only a tad less expensive than they’ve been over the past decade, trading at a P/E of 18.8 versus 19.2.
Indeed, if you are looking for bargains, you 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 Acquirers Fund (ZIG), with a P/E of 9.4; the Vanguard Vectors BDC Income ETF (BIZD), with a P/E of 8.8; and the SPDR S&P Metals & Mining ETF (XME), with a P/E of 8.5—but they are the exception rather than the rule.
Bargains Abroad
Instead, most of the bargains are found in ETFs 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. Here are the five U.S.-listed ETFs with the lowest valuations.
(See below for a more complete list.
| Ticker | Fund | P/E Ratio | Distribution Yield |
| NGE | Global X MSCI Nigeria ETF | 5.08 | 5.45% |
| ERUS | iShares MSCI Russia ETF | 5.49 | 5.98% |
| FLRU | Franklin FTSE Russia ETF | 5.64 | 5.70% |
| PAK | Global X MSCI Pakistan ETF | 5.89 | 7.60% |
| KOL | VanEck Vectors Coal ETF | 6.13 | 4.52% |
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.
But it is a good starting point for value investors for conducting a more comprehensive due diligence process.
Cheapest ETFs Are In Emerging Markets
Taking the mantle as the ETF with the lowest valuation is the Global X MSCI Nigeria ETF (NGE), with a P/E of just 5.1.
Nigerian stocks have been on a free all over the past five years, cutting 80% off the value of NGE in that time frame.
Similar low P/E’s exist in ETFs tied to other emerging markets such as the iShares MSCI Russia ETF (ERUS), the Global X MSCI Pakistan ETF (PAK), the iShares MSCI Turkey ETF (TUR) and the Invesco China Real Estate ETF (TAO), all with P/E’s between 5 and 7.
Russia is a pariah within the global community, and has traditionally been unfriendly toward shareholders; Turkey is still reeling from last year’s currency collapse and debt crisis; Pakistan is in the midst of a geopolitical conflict with India; and Chinese stocks have been getting battered due to the ongoing trade war with the U.S.
As these emerging market cases illustrate, 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.
