ETFs at Low Price to Book Value: A New Bear Market Metric

Fundamental analysts popularized the letters P-E for the general public. The almighty price-to-earnings ratio used to be the big kahuna to determine whether stock assets were "cheap."

With the worldwide turmoil pushing so many corporations to generation lows on P/E ratios, and with many companies unable to earn a profit for the E to be valid, a new wave of value pundits are touting other screens. What about a low price-to-sales? Lately, that hasn't mattered because the market no longer believes that the sales will continue. What about price-to-cash flow? Same deal.

So the new bear market metric seems to be... what's it worth on the balance sheet? More specifically, when a stock sells at "book value," a well-managed company may be able to marshal those assets and resources to put a company back on track.

Finding companies that sell at book might be hard in a normal environment, but times are hardly normal. You can find 100 companies or more. Yet you certainly couldn't find an entire index of stocks trading at a price equal to what those companies might be worth on paper.

And yet, as recent as October 27, Japan (EWJ) was trading at "book." The lows for Japan hadn't been seen since the early 80s!

Japan rallied off those generational lows. Yet Japan still maintains a very low P/B ratio relative to other indexes worldwide. Andrea D. Murphy and John J. Ray for Forbes.com also identified a number of other low P/B ETFs.

As of November 6, WisdomTree Japan SmallCap Dividend Fund (DFJ) was selling at 1.2x book value. And the Powershares High Yield Dividend Achievers Fund (PEY) was sellnig at a P/B of 1.3.

Dividend Achievers may be desirable, in a relative sense. And "relative" is the operative word.

The 50 companies in this index have a record of increasing their dividends for 10 consecutive years. And the current yield is closing in on 6%, paid to shareholders on a monthly basis.

Of course, the problem facing PEY is the same problem that's facing many of the dividend-oriented ETFs; that is, the exposure to financials is far greater than the exposure of broader market indexes. In this case, the exposure to financials is 65%.

However, PEY is a smaller-cap fund. It's the largest banks in the broader financial arena that have struggled the most. It follows that the Dividend Achievers Fund with YTD losses of -35% has handily outpaced the -50% decimation for the SPDR Select Financials (XLF).