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Chart of the week: Room for improvement

|Includes:EEM, EFA, ENY, EPI, FXI, FXN, IEZ, PSCE, PXJ, SEA, SPDR S&P 500 Trust ETF (SPY), XES, XME, XOP
The challenge for value investors is to find stocks of companies where fortunes are bad but where things are likely to improve in the future.

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*

ROE_chartClick to enlarge
*Note: Historical average calculated using five years' data.

Ticker Name ALTAR Score™ 
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%
Click to enlarge

The Chart of the week is part of our free weekly newsletter, ETF Spotlight.


Disclosure: No positions
Stocks: SPY, EFA, EEM, FXI, SEA, IEZ, XES, ENY, PSCE, FXN, PXJ, XME, XOP, EPI