Every cloud has a silver lining, and market corrections are no exception. While we all like to see rising markets, these dips provide investors who’ve been on the sidelines an opportunity to take exchange traded fund (ETF) positions on the bargain level.
In aggregating the price/fair value estimates of components within an ETF, an investor may determine the attractiveness of the ETF as determined by the size of the discount to fair value, remarks Michael Rawson for Yahoo! Finance. [The ETF Investor’s Survival Guide to Trendless Markets.]
According to Morningstar, the market is a little undervalued as reflected by the 206 ETFs that were returned when inputting an upper limit of price/fair value to 1. Morningstar analysts have deemd that the best opportunities available are currently in the large and value side. [4 Steps to ETF Investing.]
- The Vanguard Value ETF (NYSEArca: VTV) is trading at a price/fair value of 0.79, compared to the Vanguard Growth ETF (NYSEArca: VUG), which is trading at 0.87. Over the long-term, value tends to outperform. VTV has expense ratio of just 0.14% and holds about 420 stocks.
- The markets favors the large-cap side as shown by comparing Vanguard Mega Cap 300 Index ETF (NYSEArca: MGC), which trades at a price/fair value of 0.80, whereas the Vanguard Mid-Cap ETF (NYSEArca: VO) trades at 0.95. MGC holds a diversified selection of large-cap stocks. The fund has an expense ratio of 0.13%.
When inputting the “% Wide Economic Moat” criteria, which measures sustainable competitive advantage relative to a fund’s peers, 27 ETFs trade at a discount to fair value. Companies that pay a consistently large dividend usually have a wide economic moat since they already have stable, defensible market positions and have reached a point where they are able to pay out large sums of cash to shareholders. [7 ETF Rules to Mind.]
Some ETFs selections include:
- Vanguard Health Care ETF (NYSEArca: VHT). The fund has an expense ratio of 0.25% and tracks about 300 stocks.
- Health Care Select Sector SPDR (NYSEArca: XLV). XLV has an expense ratio of 0.21% and holds 52 stocks. It is more concentrated and larger in market cap as compared to VHT.
- WisdomTree LargeCap Dividend (NYSEArca: DLN). DLN is tilted toward value large-caps. The fund has an expense ratio of 0.28%.
For more information on investing in ETFs, visit our ETF 101 category.
If you’d like a simpler way to spot bargains, have an easy-to-use strategy like trend following at the ready. Right now, many positions are below their 200-day moving average; when they cross back over, consider it a buying opportunity. If you buy at this point, you’ll give yourself the opportunity to take part in a potential long-term uptrend. [Here’s More on How the Strategy Works.]
Max Chen contributed to this article.
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.