These 3 Value ETFs Are Way Cheaper Than SPY

These 3 Value ETFs Are Way Cheaper Than SPY

The passing of Charlie Munger has prompted a look at value exchange-traded funds.

Reviewed by: Staff
Edited by: Mark Nacinovich

Charlie Munger’s passing has a lot of investors thinking about value investing. 

When a famed value investor born on the first day of 1924 moves on to that great discounted cash-flow model in the sky, you know we’ve lost someone who’s seen it all. Munger was as old as the first mutual fund and was 69 by the time the S&P 500 SPDR (SPY), the first ETF, was launched in 1993.  

In between, he saw bull and bear markets, saw the Dow Jones Industrial Average components change several times and saw “cheap” stocks turn into big winners. 

Munger and his partner, Warren Buffett also witnessed many “value traps,” stocks that looked cheap on paper but whose stock prices eventually fell hard under the weight of company or industry issues that investors determined was more important to setting the stock price. 

There are classic ways to determine a “value stock” or sector, but that doesn’t mean the price of that security or market segment will trade at or near that “intrinsic value” any time soon. And more than ever, algorithms, fund flows and hedging activities have a great influence on the path taken to realizing profit from buying what one determines to be a good value. 

Value Stocks and ETFs 

To ETF investors, value might not be more than one of the words in the ETF’s name—for example, “XYZ Large Cap Value ETF.” But for those willing to go a bit deeper in their research, this might just be the best time in years to hunt for exchange-traded funds whose stock portfolios collectively sell at what could be considered outstanding value.  

So, as a bit of a salute to the late Mr. Munger, I took that next step and identified a small set of ETFs that are selling at such a discounted valuation to the S&P 500 that they are at least worth shedding light on. 

These ETFs might be a façade, or they may be tomorrow’s big winners. But that’s where any investor starts from and determines for themselves. Here’s a short list of ETFs whose diversified portfolios sell at a fraction of the S&P 500’s weighted average price-to-earnings ratio of 21, based on trailing 12-month earnings. 

Three Value ETFs  

First, at the risk of insulting the creators of a famous rap song, the iShares US Regional Banks ETF (IAT) has 99 problems, but its P/E ratio isn’t one. The ETF sells at 6.9 times trailing earnings and less than book value. It also yields 4.1%. 

Now, if we don’t have a historic collapse in the business model of regional banks, which almost happened back in March, maybe this is the comeback ETF player of the year in 2024. After all, IAT is down more than 20% this year and is down cumulatively over the past five years. Maybe that’s for good reason, or maybe sentiment is so awful toward that industry, Munger-Buffett types would feast on it at these levels. 

The ALPS International Sector Dividend Dogs ETF (IDOG) selects dividend stocks from developed stock markets other than the U.S. and Canada. Translated to U.S. dollars, IDOG has been a, pardon the pun, dog, until its sparkling 19% return this year. At 6.8 times trailing earnings and selling right at book value, value buyers might see IDOG’s strong 2023 as just the start of a long-due return to prominence for international equities.  

And for those who might be intrigued by one of many ETFs that start with the S&P 500 and then filter it down to a set of stocks that meet specific criteria, the Invesco S&P 500 Enhanced Value ETF (SPVU) takes the 500 stocks down to 100 by calculating a proprietary value score. 

This under-the-radar ETF has only $83 million in assets. That’s not the fault of its valuation, as its portfolio sells at 8.4 times trailing earnings. And it yields just over 3%, an indication that the S&P 500 does contain places to earn dividends, just not in the Magnificent Seven part of the index. 

Charlie Munger didn’t pay much attention to ETFs. But if he had used ETFs as a starting point to find true fundamental value, he might have discovered that ETFs like these three and many more like them are decent hunting ground for value stocks.  

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.