The easy-money-induced rally has pushed up valuations with many assets beginning to look expensive if not fairly valued. Nevertheless, exchange traded fund investors may still find some pockets of relatively cheap opportunities.
“The bottom line on valuations: We have picked the low-hanging fruit and are now high up on an increasingly shaky ladder, reaching for the remainder,” according to BlackRock analysts.
In the fixed-income space, government bonds have rallied on disappointing growth, limited supply and continued demand for yield-generating assets. Now, U.S. government debt is trading around the 90th percentile of their historical valuation range.
On the other hand, emerging market debt seems to be relatively cheap, trading near the 25th percentile of their historical valuation range. Investors interested in gaining exposure to emerging market bonds can take a look at options like the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), which both track USD-denominated emerging market bond securities. EMB has a 7.18 year duration and a 4.71% 30-day SEC yield. PCY has a 9.12 year duration and a 4.95% 30-day SEC yield. [Dollar-Denominated EM Bond ETFs Diminish Currency Risks]
U.S. High-yield, junk bonds are hovering near their average historical valuation range. Valuations may have pulled back after junk bond ETFs’ recent decline. the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) fell 2.3% over the past month while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) decreased 3.0%.
“We still expect U.S. high yield to perform well in the near term due to solid U.S. growth and low default rates,” the BlackRock analysts added.
In the equities space, U.S. stocks are among the most expensive, trading up to the 77th percentile of their historical valuation range, with the S&P 500 showing a price-to-earnings of 17.6% and a price-to-book of 2.4.
Among developed countries, Australia, Italy and Japan equities markets remain below their average historical valuation range. The iShares MSCI Australia ETF (NYSEArca: EWA) has a 14.7 P/E and a 1.8 P/B. The iShares MSCI Italy Capped ETF(NYSEArca: EWI) has a 16.1 P/E and a 0.8 P/B. The iShares MSCI Japan ETF (NYSEArca: EWJ) has a 15.2 P/E and a 1.2 P/B.
Russia is the cheapest emerging market after the major sell-off this year in response to falling oil prices, volatility associated with the Ukraine conflict and Western sanctions. The Market Vectors Russia ETF (NYSEArca: RSX) is now trading at a 6.6 P/E and a 0.9 P/B. [Finally, Outflows From Russia ETFs]
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Max Chen contributed to this article. Tom Lydon’s clients own shares of EMB.