Every cloud has a silver lining, and market corrections are no exception. While we all like to see rising markets, these dips provide investors who’ve been on the sidelines an opportunity to take ETF positions on the bargain level.
In aggregating the price/fair value estimates of components within an ETF, an investor may determine the attractiveness of the ETF as determined by the size of the discount to fair value, remarks Michael Rawson for Yahoo! Finance.
According to Morningstar, the market is a little undervalued as reflected by the 206 ETFs that were returned when inputting an upper limit of price/fair value to 1. Morningstar analysts have deemed that the best opportunities available are currently in the large and value side.
- The Vanguard Value ETF (NYSEARCA:VTV) is trading at a price/fair value of 0.79, compared to the Vanguard Growth ETF (NYSEARCA:VUG), which is trading at 0.87. Over the long-term, value tends to outperform. VTV has expense ratio of just 0.14% and holds about 420 stocks.
- The markets favors the large-cap side as shown by comparing Vanguard Mega Cap 300 Index ETF (NYSEARCA:MGC), which trades at a price/fair value of 0.80, whereas the Vanguard Mid-Cap ETF (NYSEARCA:VO) trades at 0.95. MGC holds a diversified selection of large-cap stocks. The fund has an expense ratio of 0.13%.
When inputting the “% Wide Economic Moat” criteria, which measures sustainable competitive advantage relative to a fund’s peers, 27 ETFs trade at a discount to fair value. Companies that pay a consistently large dividend usually have a wide economic moat since they already have stable, defensible market positions and have reached a point where they are able to pay out large sums of cash to shareholders.
Some ETFs selections include:
- Vanguard Health Care ETF (NYSEARCA:VHT). The fund has an expense ratio of 0.25% and tracks about 300 stocks.
- Health Care Select Sector SPDR (NYSEARCA:XLV). XLV has an expense ratio of 0.21% and holds 52 stocks. It is more concentrated and larger in market cap as compared to VHT.
- WisdomTree LargeCap Dividend (NYSEARCA:DLN). DLN is tilted toward value large-caps. The fund has an expense ratio of 0.28%.
Max Chen contributed to this article.