5 Country ETFs More Attractive Than SPY

by: Hao Jin, CFA

S&P 500 (NYSEARCA:SPY)'s P/E is 15 and its 30-day SEC yield is 2%. Is there any other country with better opportunity than the USA market? Followings are 5 iShares country ETFs with net assets greater than $100 million, yield higher than 2% and P/E lower than 15:

5 Country ETFs with Lower P/E and Higher Yields

Fund Name (Symbol) Total Assets 30-Day SEC Yield Price/Earnings
MSCI Russia Capped Index (NYSEARCA:ERUS) 0.2B 2.2% 8.4
FTSE China 25 Index Fund (NYSEARCA:FXI) 5.9B 2.8% 12.5
MSCI Italy Index Fund (NYSEARCA:EWI) 0.2B 2.9% 13.6
MSCI Spain Index Fund (NYSEARCA:EWP) 0.2B 4.0% 14.1
MSCI Singapore Index Fund (NYSEARCA:EWS) 1.5B 2.8% 14.2

However, due to different economic structure, each country ETF has different sector weights. For example, the reason MSCI Russia Capped Index has the lowest P/E is mainly because 55% of its holdings are in the energy sector.

SPY consists of 10 sectors. In order to compare apple with apple, I adjusted those 5 country ETFs based on their sector weights and SPY sector P/Es. The sector-weight-adjusted P/Es are as follows:

Sector (Symbol) SPY P/E SPY Weight % ERUS FXI EWI EWP EWS
Consumer Dis. (NYSEARCA:XLY) 15 11.1% 0% 0% 7% 5% 9%
Consumer St. (NYSEARCA:XLP) 18 10.9% 5% 0% 0% 2% 6%
Energy (NYSEARCA:XLE) 11 11.3% 55% 15% 31% 5% 0%
Financial (NYSEARCA:XLF) 13 15.1% 14% 57% 29% 42% 47%
Healthcare (NYSEARCA:XLV) 18 12.3% 0% 0% 0% 2% 0%
Industrials (NYSEARCA:XLI) 14 9.9% 0% 2% 10% 10% 26%
Materials (NYSEARCA:XLB) 18 3.5% 12% 9% 0% 1% 0%
Technology (NYSEARCA:XLK) 16 19.2% 0% 0% 0% 3% 0%
Telecom (NYSEARCA:XTL) 20 3.2% 7% 17% 5% 16% 11%
Utilities (NYSEARCA:XLU) 17 3.6% 6% 0% 18% 13% 0%
Adjusted P/E 15 100.0% 13.5 14.2 13.6 15.0 14.3

Even after adjusting for sector weights, ERUS and FXI are still more attractive than SPY.

Dividend Growth Model

The Dividend Growth Model, or Gordon Growth Model, is a tool that is commonly used to evaluate intrinsic value of a stock based on a future series of dividends that grow at a constant rate. The price of a stock (NYSE:P) = Dividend / (Required Rate of Return - Growth Rate). This model simplistically assumes constant growth rate perpetuity so it is best applied to mature companies or broad market indices such as a country.

If we switch the formula around, we can get: Rate of Return = Growth Rate + Dividend Rate. In other words, the higher the dividend growth rate, the higher total return you will get.

China and Russia Grow Faster than Developed Counties

FXI dividend yield is 2.8%, and China's growth rate is 7.4%. So this ETF could give you a return of 10.2% annually, based on the Gordon Growth Model.

Even though Russia's current economic model has a large number of serious structural deficiencies, it is still likely to continue growing at 4% in the next few years.

The purpose of the Fed's QE3 program is to stimulate job growth. However, this is "mission impossible" because those job losses were due to technology changes. We've seen that those who have clung to outmoded, rigid, stale, conformist notions of formal higher education are now getting slaughtered economically, as their formerly safe jobs get outsourced, downsized, offshore, and automated, and as once-secure establishments crumble into the wireless, digital, networked ethers, according to Michael Ellsberg, author of The Education of Millionaires. Nevertheless, the Fed's QE unlimited stimulus plan could certainly benefit export orientated economies such as China and Russia.


Economic cycle - boom and bust - can be driven by speculation and financial manipulation, as was the decade just ending. But at a deeper level, economic expansion and contraction are driven by demographic forces and by technology innovation, according to George Friedman, author of The Next Decade.

China and Russia are likely to join the ECB and the Fed to launch monetary bazookas. Massive stimulus plans from these 2 countries could extend their sustainable growths.

Note: Data is from iShares.com and SPDRS.com and is valid as of Oct 31, 2012.

Disclosure: I am long FXI, ERUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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