ETF Expert: Are Utilities The Only True Bargain Still Left In The Bin?
14 July 2009 at 4:48 pm by Gary Gordon
"Shiller's P/E" is a straightforward valuation concept. Take today's price (S&P 905) and divide it by the last 10 years of earnings results.
According to the team of Arnott and West at Research Affiliates, the historical valuation level for this metric is 16.4; today's Shiller P/E is not far off at 15.8. (Back in March, the same measure had dipped as low as 11.2.)
With today's markets approximating a fairly valued Shiller's P/E, one wonders whether the current level of market volatility/risk justifies additional stock exposure. In fact, one might conclude that it only makes sense to pursue undervalued ETFs with less risk than the S&P 500 SPDR Trust (SPY).
For the purpose of identifying less risky investments, I screened for 1-year betas below 0.90. And for undervalued ETFs… I used price-to-book ratios that came in at less than 2 as well as "price-to-Morningstar-fair-values" of 0.90 or lower.
| Low-Risk and Underappreciated Stock ETFs | |||||||
| P/B | P/FV | Beta | |||||
| Vanguard Utilities (VPU) | 1.3 | 0.89 | 0.55 | ||||
| SPDR Select Utilities (XLU) | 1.5 | — | 0.62 | ||||
| iShares DJ Utilities (IDU) | 1.5 | — | 0.65 | ||||
| Vanguard Communications (VOX) | 1.5 | 0.76 | 0.8 | ||||
It's no surprise that telecom and utilities were less "volatile" than the broader market over the last year. However, it is a bit of surprise… in a time when cash flow/income may be more critical to some investors than growth… that investors aren't biting the bigger "yielders."
Utilities remain the biggest underperformer in 2009. Nevertheless, in the context of entire bear market performance, utilities haven't been all that shabby. More importantly, if valuation matters at all, investors may start acquiring shares of Vanguard Utilities (VPU) and SPDR Select Utilities (XLU) in the weeks ahead.
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Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
Thanks Gary, great article. I agree with you about utilities. Utilities seem to be the way to go here with seemingly everything being overpriced with governments’ purposeful reinflation of asset prices via 0% rates, which are here for likely at least another year. Any idea what Shiller’s P/E would be for U.S. and global utilities?