5 ETFs With Single-Digit P/E's That Trade Near "Book Value"

Right now, if you pay particularly close attention to data, there are a number of ETFs that might pop up on your "bargain-hunter" screen. For example, let's say that you like the idea of fundamental value for the longer-term. Then you might survey the landscape for ETFs that trade with low P/Es AND low P/Bs.

But first, let's take a look at P/Es, P/Bs and what the "combined info" may or may not tell us. For individual stocks, a low P/E may represent a company where the share price (P) is trading much lower than it "should" relative to what the company is earning per share (E). Different industries often command different P/E averages. For example, people have often paid a higher price for expected growth industries like technology, while paying less for consumer staples companies.

Today, most industries are trading far below their historic P/E averages, with the exception of defensive areas like utilities and healthcare. Historically speaking, it is rare to find broad market indexes trading for single digit multiples (i.e. P/Es).

But how do we know that an index ETF is trading for a single-digit P/E? Data represent a mean or median P/E for the stocks in the exchange-traded fund basket. The methodology in and of itself may be flawed; however, I feel that single-digit P/Es on broad market indexes and non-financial indexes (e.g., REITS, banks, insurance, etc.) may still merit a "potential bargain" tag.

At the same time, it may not be enough to use low P/Es alone. The data on today's earnings may not be as meaningful when the outlook for future corporate earnings is so murky. That's why it's important to consider yet another metric such as, the price-to-book ratio (P/B).

The total net asset value of a company (i.e., what it's worth on paper) is known as book value. And it's not too common to find a majority of companies in a given exchange-traded basket trading for less than what they collectively might garner if they were all liquidated. Yet such is the case in the new world order... there ARE a number of exchange-traded index funds trading at book value or less.

 

Low P/B, Single-Digit P/E ETFs
				P/B	P/E
PowerShares MicroCap (PZI)				0.7	9.9
SPDR International Small Cap (GWX)				0.9	7.6
WisdomTree Japan Small Cap (DFJ)				0.9	9.7
iShares MSCI EAFE Small Cap (SCZ)				1	7.3
iShares Hong Kong (EWH)				1	6.1

No ambiguity here! From the smallest companies in the U.S. vis-a-vis PZI, to the small caps of Europe, Japan, Australia and Asia, investors are spooked. If a mantra for the biggest companies is "too big to fail," the question on small fries may be, "Too small to survive?"

Clearly, small company survival is the question of this global recession. By the same token, however, a diversified basket through an ETF is a calculated bet on a turnaround. Small companies often lead the way out of a recession, and the valuations appear compelling.

Japan is particularly intriguing. Take a look at the ability of WisdomTree Japan Small Cap (NYSE: DFJ) to achieve separation from its larger-cap rival, iShares Japan (NYSE: EWJ).

 

Unfortunately, the same separation pattern can not be said for iShares MSCI EAFE Small Cap (NYSE: SCZ), as it is underperforming the large cap MSCI EAFE Fund (NYSE: EFA) since the global bear market began.

 

If you'd like to learn more about ETF investing... then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

 

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.