Evaluating ETFs: The Cheap and The Overvalued

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 |  Includes: DGT, GDX, IEZ, IVV, OEF, XES, XLG
by: Tom Lydon
Sonya Morris for Morningstar reports that an ETF should be judged by the valuation characteristics of its underlying holdings.

One key indicator is the price/fair value ratio. To compute the ratio, they calculate the aggregate market price for the ETFs underlying holdings and divide that number by the asset-weighted fair value estimate of those stocks. Above 1.0 equals overvalued, where market price exceeds fair value and under 1.0 says the ETF is cheap.

The Cheap:

  • iShares S&P 100 (NYSEARCA:OEF)
  • iShares S&P 500 (NYSEARCA:IVV)
  • Rydex Russell Top 50 (NYSEARCA:XLG)
  • SPDR DJ Global Titans (NYSEARCA:DGT) (in relation to small and mid-cap stocks.)
  • The Overvalued:

  • iShares Dow Jones US Oil Equipment Index (NYSEARCA:IEZ)
  • SPDR S&P Oil & Gas Equipment & Services (NYSEARCA:XES)
  • Market Vectors Gold Miners (NYSEARCA:GDX)