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Note: The following is an excerpt from our weekly newsletter, ETF Spotlight, which can be downloaded here.

Everyone wants to own stocks of fast-growing companies, but the question is, "At what price?" The price-to-growth, or PEG, ratio, is a common way to adjust valuations for growth prospects. The formula is a security's price-to-earnings (P/E) ratio, divided by the consensus long-term growth rate for earnings (expressed as an integer). Generally, stocks with a PEG ratio of 1.0x or less are said to be selling at "reasonable" multiples, given their growth prospects.

Here we must mention that consensus long-term growth estimates are one of the most routinely biased figures on Wall Street. Nearly any P/E can be "justified" by an overly-optimistic growth forecast. For example, the current LTG forecast for S&P500 firms is 11.1%, despite the fact that since the end of WWII earnings have grown 6.4% annually. Nonetheless there is no evidence that the over-optimism is exaggerated more in some areas than in others, so the PEG ratio is still useful for comparing funds even if the ratio's level is inaccurate.

In any case, this week's chart shows the ETFs with the lowest PEG ratios. Six of the 10 are basic materials-related funds, most selling for single-digit P/E multiples but with forecast growth rates in the upper-teens. Again, those figures may prove too optimistic, but the market seems to be pricing those stocks at low, "peak earnings" multiples, where little if any growth could be expected. So if earnings still have substantial room to grow over the next 3-5 years these funds may in fact be rather cheap.

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Figure 1: Growth at a reasonable price ("GARP") ETFs

ETFs with the lowest price-to-growth, or PEG, ratios*

*Note: based on 2011E EPS divided by LT growth estimates

Source: etfresearchcenter.com

Table: Ticker, fund name and ALTAR Score of funds in above chart.

Ticker Name PE / LTG ALTAR Score™
EMFN iShares MSCI Emg. Mkts. Financials Sector 6.3x / 18% 12%
SLX Market Vectors Steel 9.0x / 24% 12%
CRBI Jefferies TR/J CRB Global Industrial Metals Equity 9.0x / 19% 11%
CHIX GlobalX China Financials 10.6x / 22% 8%
CU First Trust ISE Global Copper 8.8x / 18% 13%
DGS WisdomTree Emg. Mkts. Small Cap Dividend 7.1x / 14% 12%
EMT Emerging Mkts. Metals & Mining Titans 9.2x / 18% 9%
SKOR-OLD IQ South Korea Small Cap ETF 9.5x / 17% 4%
EMMT iShares MSCI Emg. Mkts. Materials Sector 9.5x / 17% 8%
DBN WisdomTree International Basic Materials 11.3x / 20% 8%

Disclosure: No positions

Source: Growth at a Reasonable Price ('GARP') ETFs