Are Healthcare ETFs Undervalued by 40%?

Fair value may be in the eye of the beholder. And when it comes to Morningstar's assessment of intrinsic worth of exchange-traded funds, bloggers have been less than kind.

Nevertheless, Morningstar makes a valid attempt at determining a price at which... above it, you might sell, below it... you might buy. So it is interesting to note that 4 out of 5 of the most "undervalued" ETFs in the Morningstar system are healthcare ETFs.

Most "Undervalued" ETFs According to Morningstar
						Price/Fair Value
Morningstar ELEMENTS Wide Moat ETN (WMW)						0.63
Health Care Select Sector SPDR (XLV)						0.67
Pharmaceutical HOLDRS (PPH)						0.68
iShares DJ Healthcare Fund (IYH)						0.69
Vanguard Healthcare (VHT)						0.69
Most "Overvalued" ETFs According to Morningstar						Price/Fair Value
FirstTrust Chindia (FNI)						1.26
PowerShares Private Equity (PSP)						1.18
PowerShares Golden Dragon Halter China (PGJ)						1.14
Ishares DJ U.S.Oil Equipment (IEZ)						1.13
SPDR KBW Capital Markets (KCE)						1.12

In fact, for the price-to-fair-value for Vanguard Health Care (VHT) to be 0.69, the current share price of $45 is actually believed to be worth approx $65. That represents the potential for 44% appreciation.

While intrinsic worth a la Morningstar fair value may not be "worth" a whole heck of a lot, it is additional evidence that health care and pharmaceuticals have been seriously overlooked by investors. (See "Forgotten Pharma May Bounce Back With Swine Flu Fears.")

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Alan Young:]

An ETF can only be under- or over-valued if some of its stocks are EVEN MORE so. It would be more profitable, IMO, to find which specific stocks lead the valuation disparity in these ETFs. That is, if you believe M* valuations to begin with.

Jun 16 09:12 AM