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.