Is there a method to evaluate the valuations and attractiveness of major market indexes and the exchange traded funds (ETFs) that follow them?

Morningstar’s 100-plus equity analysts can help give some insight. With more than 2,000 stocks under scrutiny, their research spans most of the market. Sonya Morris for Morningstar reports that the Dow’s discount to fair value is where it was at the close of the second quarter. Overall, the S&P looks less expensive than three months ago. Financials and consumer-related ETFs also are looking attractive lately.

Several financial ETFs boast compelling valuation characteristics. For example, iShares Dow Jones US Financial Services (IYG) is trading at roughly 16% discount to its aggregate fair value and the Fiancial Select Sector SPDR (XLF) is trading at a 12% discount. For a more direct approach to bank stocks, there is the KBW Bank ETF (KBE).

ETFs that focus on the retail sector look inexpensive lately. SPDR S&P Retail (XRT) and Retail HOLDRs (RTH) boast price/fair value ratios of 0.88 and 0.86 respectively. However, it’s important to know that the make up of these two ETFs are different despite their similar names.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.