Are Healthcare ETFs Undervalued by 40%?

by: Gary Gordon

Fair value may be in the eye of the beholder. And when it comes to Morningstar's assessment of intrinsic worth of exchange-traded funds, bloggers have been less than kind.

Nevertheless, Morningstar makes a valid attempt at determining a price at which... above it, you might sell, below it... you might buy. So it is interesting to note that 4 out of 5 of the most "undervalued" ETFs in the Morningstar system are healthcare ETFs.

Most "Undervalued" ETFs According to Morningstar

Price/Fair Value
Morningstar ELEMENTS Wide Moat ETN (NYSEARCA:WMW) 0.63
Health Care Select Sector SPDR (NYSEARCA:XLV) 0.67
Pharmaceutical HOLDRS (NYSEARCA:PPH) 0.68
iShares DJ Healthcare Fund (NYSEARCA:IYH) 0.69
Vanguard Healthcare (NYSEARCA:VHT) 0.69
Most "Overvalued" ETFs According to Morningstar Price/Fair Value
FirstTrust Chindia (NYSEARCA:FNI) 1.26
PowerShares Private Equity (NYSEARCA:PSP) 1.18
PowerShares Golden Dragon Halter China (NASDAQ:PGJ) 1.14
Ishares DJ U.S.Oil Equipment (NYSEARCA:IEZ) 1.13
SPDR KBW Capital Markets (NYSEARCA:KCE) 1.12

In fact, for the price-to-fair-value for Vanguard Health Care (VHT) to be 0.69, the current share price of $45 is actually believed to be worth approx $65. That represents the potential for 44% appreciation.

While intrinsic worth a la Morningstar fair value may not be "worth" a whole heck of a lot, it is additional evidence that health care and pharmaceuticals have been seriously overlooked by investors. (See "Forgotten Pharma May Bounce Back With Swine Flu Fears.")

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

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