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One of the many benefits that we accrue from covering 2,000 stocks is the ability to tap our research to value exchange-traded funds. Where others might use notoriously imprecise methods such as top-down macro forecasting to gauge an ETF's fundamental attractiveness, we're able to go bottom-up, stock-by-stock.
To understand how, consider the largest ETF in the world, the S&P 500 SPDR (SPY, news, msgs) exchange-traded fund, which tracks the S&P 500 Index.
We can roll up the fair-value estimates that we've placed on more than 470 of the S&P's 500 constituent stocks (representing roughly 98% of the index) in order to derive a fair-value estimate for the SPDR. Once we've estimated an ETF's fair value, we can compare it with the fund's price, just as we do in our stock research.
The lower an ETF's market price relative to our fair-value estimate, the more attractive we'd consider it, and vice versa. (The SPDR was trading at a 7% discount to our fair value estimate as of Oct. 19, in case you were wondering.)
Which ETFs are in the bargain bin these days? Here's a short list that we've drawn from the nearly 300 stock ETFs for which we have comprehensive coverage of the underlying equities (defined as coverage on stocks accounting for at least 70% of the fund's assets).
Financial-services ETFs
Consumer-related ETFs
Diversified ETFs
Financial-services ETFs
You have plenty to choose from in this sector, which has been waylaid by cascading fears over higher interest rates, a slumping real-estate market and shoddy lending practices. The typical financial-services stock that we cover was trading at a 6% discount to its fair-value estimate as of Oct. 19.That's reflected in the valuation of the broad financials-market funds that we cover, which are typically trading at 10%-20% discounts to our fair-value estimate. Rydex S&P Equal-Weight Financial (RYF, news, msgs) (13% discount) and iShares Dow Jones U.S. Financial Sector (IYF, news, msgs) (17% discount) are two such examples.
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To find some of the biggest bargains, square your sights on the financials subsector ETFs, a number of which have gotten battered amid the sell-off. Here are our favorites at the moment:
- KBW Bank
This fund teems with values -- all but a handful of the portfolio's 25 stocks were trading at a discount to our fair-value estimates as of Oct. 19. And many of those discounts were steep, with many of the fund's global bank holdings trading at 25% or larger discounts to fair value.
These include Citigroup (C, news, msgs), Bank of America (BAC, news, msgs), JPMorgan Chase (JPM, news, msgs) and super-regional Wachovia (WB, news, msgs) and Fifth Third Bancorp (FITB, news, msgs) among others.
The fund's narrow focus means we'd ordinarily demand a 15% discount to fair value before recommending it. By that standard, it screams "buy."
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- Regional Bank HOLDRs and iShares Dow Jones U.S. Regional Banks
Don't let the names fool you -- with top holdings including giants like JPMorgan Chase, Wachovia and US Bancorp (USB, news, msgs), these funds are hardly a dumping ground for toaster-peddling community savings banks or rinky-dink S&Ls.
In some cases, such as Regions Financial (RF, news, msgs), these companies have been punished by investors concerned about contracting net-interest margins or mounting loan losses, subprime-mortgage exposure in particular.
To our eyes, the selling looks overdone, and many look cheap, explaining these regional bank funds' compelling valuations.
- iShares Dow Jones U.S. Financial Services
This is the most diversified of the four financials ETFs profiled, spanning virtually every financials subsector. You won't have to squint hard to figure out why: Its top three holdings -- Citigroup, Bank of America and JPMorgan Chase -- recently soaked up nearly 30% of assets, and all three of those stocks are trading well below fair value, in our estimation.
Consumer-related ETFs
Is the U.S. consumer rolling over? That question has bedeviled consumer stocks in recent months, as investors weighing the prospects of an economic slowdown or resurgent inflation have seemed to sell first and ask questions later.Continued: The cheapest of the bunch
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