When domestic and international equity markets tumbled in the first three months of this year, bargain hunters were overwhelmed with possibilities. As price-to-earnings ratios plunged into the single digits, those who follow the Buffett mantra “be fearful when others are greedy and greedy when others are fearful” were presented with one of the best buying opportunities in recent memory. But since March, equity markets have staged impressive recoveries, making good values hard to come by.
In fact, many well-respected investors with sound track records believe U.S. markets have become significantly overvalued, with only a matter of time before a downward correction erases some of the gains posted over the last six months. Last month Jeremy Grantham estimated that the stock market is 25% overvalued, making two dismal predictions for the first half of 2010. “First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away,” wrote Grantham. “Second, the slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.”
As investors become more and more anxious about the fundamental support for U.S. stock prices, many have begun looking overseas for investments that seem less likely to be inflated. State Street computes and publishes a forward-looking price-to-earnings ratio for each of its ETFs, calculated as the closing share price divided by the sum of forecasted fiscal year earnings per share of the underlying stocks. The S&P 500 SPDR (SPY) is currently trading at about 16 times forward earnings, putting it near the top of the various SSgA equity ETFs.
But there are still some bargains out there. Below is a look at seven ETFs featuring significantly more attractive P/E ratios (in order to ensure consistency across funds, we only considered State Street ETFs for this analysis, but several other issuers offer funds providing similar exposure). For more actionable investment ideas, sign up for our free ETF newsletter.
- SPDR S&P Emerging Markets ETF (GMM): This ETF offers exposure to equities from more than 25 emerging markets, spread across a variety of sectors in these economies. GMM has a forward P/E of 15.5, but obviously comes with the unique risk characteristics associated with emerging markets investing.
- SPDR S&P Emerging Europe ETF (GUR): Within the emerging markets category, European stocks offer extremely attractive forward pricing multiples. This ETF offers exposure to primarily Russia, Turkey, and Poland, and has a forward P/E of under 11.
- SPDR S&P Emerging Middle East & Africa ETF (GAF): This ETF is another appealing emerging market fund offering a forward P/E well below SPY. GAF focuses primarily on South Africa and Israel, and has a P/E of about 14.
- SPDR DJ Euro Stoxx 50 ETF (FEZ): This ETF offers exposure to 50 of the largest European stocks, including Banco Santander and Total. FEZ focuses exclusively on developed European economies, and allocates more than 75% of its holdings between France, Germany, and Spain. FEZ has a forward P/E of just 12.4.
- SPDR DJ Global Titans (DGT): This ETF tracks a benchmark composed of 50 of the largest global stocks, including Exxon Mobil, HSBC, Johnson & Johnson, and Nestle. Although there is considerable overlap between DGT and SPY, this fund has a forward P/E of only 14.6, nearly 10% lower than SPY.
- SPDR MSCI ACWI ex-U.S. ETF (CWI): This ETF avoids exposure to the U.S. completely, focusing on both developed and emerging economies around the world. In addition to well-diversified geographic exposure, CWI has a forward P/E of just 14.7.
- SPDR S&P International Dividend ETF (DWX): This ETF includes about 100 stocks from around the world that offer high dividend yields. Given this strategy, it isn’t surprising that DWX has a forward P/E of only 13.5.
|SPY||SPDR S&P 500||16.0|
|FEZ||SPDR DJ Euro Stoxx 50||12.4|
|GMM||SPDR S&P Emerging Markets||15.3|
|GUR||SPDR S&P Emerging Europe||10.7|
|GAF||SPDR S&P Emerging Middle East & Africa||13.8|
|DGT||SPDR DJ Global Titans||14.6|
|CWI||SPDR MSCI ACWI ex-U.S.||14.7|
|DWX||SPDR S&P International Dividend||13.5|
Pricing multiples alone aren’t enough to make an investment decision, but they can be useful in narrowing down options for value investors looking to increase their equity exposure at a reasonable price. For those that have put aside the “home country bias” and are open to options outside of the U.S., there are several options that may look relatively attractive in the current environment.
Disclosure: No positions at time of writing.