ETFs With The Lowest Valuations

August 23, 2019

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.

Low Valuation, High Yield

While emerging market ETFs make up most of the low-P/E list, there are a few of other names there. The ProShares Global Listed Private Equity ETF (PEX) is one of those. It holds a basket of private equity stocks from around the world, including the U.S., the U.K., France and Canada. Like many low-P/E ETFs, PEX has a hefty distribution yield of 5.6%.

Ironically, there is only one value ETF among the ETFs with the lowest P/E’s: the Alpha Architect International Quantitative Value ETF (IVAL).

IVAL selects its holdings from the developed ex-U.S. equity universe, using the EV/EBIT (enterprise value to earnings before interest and taxes) ratio as its measure of valuation. It holds the cheapest 10% of stocks from its universe.

Even according to the different valuation measure we are using—P/E—the ETF stands out as cheap, with a ratio of 8.6. Top holdings are from Japan, the U.K., Australia and Norway.

Rock-Bottom P/E’s For Commodity ETFs

Finally, rounding out the low valuation list are a handful of commodity-focused funds. The VanEck Vectors Coal ETF (KOL), the VanEck Vectors Steel ETF (SLX) and the aforementioned SPDR S&P Metals & Mining ETF (XME) all find themselves with rock-bottom P/E’s.

That’s not surprising. Commodities have been deeply out of favor amid ample supplies and slowing demand.

Some commodities, like coal, are even at risk of obsolescence as countries frantically cut back on their consumption of the fuel due to pollution and climate concerns. Given the dismal outlook for the industry, investors are unwilling to pay for shares of global coal producers. KOL has a P/E of only 6.1.

For a full list of low-P/E ETFs, see the table below. Also included is a list of funds with low price-to-book (P/B) ratios, another valuation metric often used by investors, which measures the price of a fund divided by its book value per share.

 

ETFs With The Lowest P/E Ratios

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%
TUR iShares MSCI Turkey ETF 6.41 4.56%
RSX VanEck Vectors Russia ETF 6.66 6.28%
SLX VanEck Vectors Steel ETF 6.81 3.29%
TAO Invesco China Real Estate ETF 6.9 3.94%
FCA First Trust China AlphaDEX Fund 7.14 4.57%
CHIR Global X MSCI China Real Estate ETF 7.25 4.48%
CHIX Global X MSCI China Financials ETF 7.38 3.78%
PEX ProShares Global Listed Private Equity ETF 8.03 5.82%
RFEM First Trust RiverFront Dynamic Emerging Markets ETF 8.07 2.96%
CHIM Global X MSCI China Materials ETF 8.31 4.29%
XME SPDR S&P Metals & Mining ETF 8.46 1.51%
IVAL Alpha Architect International Quantitative Value ETF 8.59 4.21%
EYLD Cambria Emerging Shareholder Yield ETF 8.64 5.33%
EEMD AAM S&P Emerging Markets High Dividend Value ETF 8.69 5.95%
CHIE Global X MSCI China Energy ETF 8.72 4.71%

Source: ETF.com Screener, powered by FactSet

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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