PlanetQuant's ETF Analysis: Best Values Are in Europe

Will China & Brazil recover? It seems an odd question to ask of two indexes that have delivered the highest one year returns, +91% and +76% respectively, and that have repeatedly been able to rebound from previous declines. The difference between the two indexes is that Brazil's PE ratio is still only half that of China's, and the recent loss has been nowhere near as severe. Those differences help to keep Brazil (EWZ) at the top of our rankings, but move China (FXI) to close to the bottom.

Volatility for the two ETFs is in the 70s, remaining sky-high in these and other emerging markets. Note that despite higher returns, most emerging market ETFs are still highly correlated with the EAFE (EFA), our foreign market index. In fact, in the past 30-day, 90-day, and 1-yr periods, the EEM (EEM) has provided very close to double the return, either positive or negative, of EFA, resulting in little real diversification. One country that has provided both diversification and high returns is Spain (EWP), a top performer with a low EFA correlation, reasonable valuations, and excellent relative near-term performance.

The best values in our analysis are still found in Europe, a region that has performed poorly this year relative to Asia (EPP) and Latin America (ILF), but has still fared better than the US. This trend may be reversing, and in the past thirty days, several European countries, specifically Spain (EWP), Germany (EWG), Italy (EWI), France (EWQ), and Switzerland (EWL) have managed to avoid the severe losses taken by many Latin American and Asian countries. Perhaps investors are betting that the low share valuations and strong currency will help limit the region's losses in the event of an economic slowdown.

METHODOLOGY: ETF prices are compiled daily from Yahoo! Finance/Morningstar data. Published valuation ratios are used and then adjusted based on daily price changes. Correlations are based upon one year, and volatility is based upon twenty-two market days. The scores from 0 (worst) to 4 (best) represent the range (2 +/- 2 standard deviations) of normalized variables for a category. For example, a valuation score of 3 for a country indicates that the valuation variables (p/e, p/b, and p/cf) equal-weighted, are one standard deviation better than the average for the group.