Since Return on Equity (ROE) is one of the most important indicators of a firm's profitability, we screened our universe for ETFs where current ROE is the furthest below average ROE over the course of the business cycle. This implies that while things are lousy now for these firms, results could improve substantially in coming years.
Of course, valuations matter as well. Most, but not all, of the ETFs on the list have fairly high ALTAR Scores, our measure of an ETFs overall investment merit. As a result, we think it is likely that the prices for most of these funds will also improve along with the fortunes of the underlying constituents.
Figure: Room for improvement
ETFs with the biggest upside from 2010E return on equity to business cycle average*
Click to enlarge
*Note: Historical average calculated using five years' data.
|SEA||Claymore Delta Global Shipping||23.1%|
|IEZ||iShares DJ Oil Equipment & Services||11.4%|
|XES||SPDR Oil & Gas Equipment & Services||12.0%|
|ENY||Claymore/SWM Canad Energy Income||7.9%|
|XLES||PowerShares S&P Small Cap Energy||12.3%|
|FXN||First Trust Energy Alphadex||12.0%|
|PXJ||PowerShares Dynamic Oil & Gas Services||10.4%|
|XME||SPDR Metals & Mining ETF||9.8%|
|XOP||SPDR S&P Oil & Gas Exploration||10.4%|
|EPI||WisdomTree India Earnings||9.9%|
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Disclosure: No positions