We think the best exchange traded funds are those that have a low or reasonable expense ratio, have holdings that are collectively underpriced, and have technical and momentum indicators that are currently exhibiting bullish trends.
We embrace forward-looking thinking, and our ETF ratings consider the forward-looking fair values of an ETF's holdings, using our robust equity valuation process and the Valuentum Buying Index as a guide. Other research firms may not even calculate a fair value estimate for an ETF's holdings, leaving us to wonder how they can possibly form an opinion on the future direction of an ETF's fundamental value. And surprisingly, the ratings of other well-known independent ETF research providers aren't even used to select their favorite funds. So what are investors to do?
Well, we believe the future is all that matters in investing, and comparing and ranking the historical performance of an ETF versus peers in the past is a sure way to guarantee random results in the future. The age-old adage that past performance does not guarantee future results resonates with our subscriber base. Our ETF reports are designed to serve the needs of individual investors and financial advisors.
In each ETF report, we tell you what we think of the firm's potential excess return, the timeliness of it as an investment based on an overall technical assessment, and compare its expense ratio versus peers. We can't see another meaningful way to evaluate an ETF, and you can rest assured that our ratings actually mean something and aren't just a scorecard of an investment's performance using the rear-view mirror as the playing field. The Financial Crisis has taught us that rear-view-mirror investing is a recipe for disaster.
Another benefit of our expansive coverage is that we can calculate a fair value estimate of major indices on the basis of taking the weighted average fair value estimate of an ETF's constituents. That's how we arrive at our 1430 fair value for the S&P 500, using the SPY as a proxy. Let's get into the details.
Our ETF Report on the SPDR S&P 500 (SPY)
First, the SPDR S&P 500 is one of the most common ways to mirror the performance of the S&P 500 Index. We like its cost structure, but we're not seeing much upside from today's levels. The ETF scores a 3 on our VBI.
Expanded Portfolio Analytics
And now to the nitty-gritty. We show below the expanded porfolio analysis of the SPY's holdings. We've limited the image to the top holdings, where we reveal our estimate of the price-fair value ratio of each holding based on our DCF valuation. As one can see in the header of the image below, our fair value estimate for the SPDR S&P 500 is $143.38, which translates into a fair value for the S&P 500 north of 1430.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.