With U.S. markets breaking into new record highs, more investors are concerned about pricey valuations in equities. Nevertheless, there are some sector exchange traded funds that look relatively cheap.
“Financials had the lowest relative valuations of any sector in Q2, based on its low price-to-earnings (P/E) and price-to-book (P/B) ratios. Telecom also looked compelling on a P/E basis, but mixed on other metrics,” according to Fidelity’s Quarterly Sector Update.
For instance, the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL), which tries to reflect the performance of the MSCI USA IMI Financials Index, currently trades with a 15.2 price-to-earnings and a 1.3 price-to-book.
The Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM), which reflects the performance of the MSCI USA IMI Telecommunication Services 25/50 Index, shows a 18.5 P/E and a 2.1 P/B.
Meanwhile, the S&P 500 Index is hovering around a 19.9 P/E and a 2.8 P/B.
“I think risk/reward is lining up positively for financials,” Denise Chisholm, Fidelity sector strategist told ETF Trends in a call.
The financial and telecom sectors also appear cheap as the two areas have largely fallen behind in the growth-oriented, post-election rally this year. Year-to-date, FNCL is up 8.5% and FCOM is 4.8% higher while the S&P 500 has increased 11.8%.
Quarterly earnings has also not been very kind toward the two segments as financials has exhibited some of the slowest earnings-per-share growth over the past 12 months, and telecoms have shown the worst EPS growth over the past year and was the only sector that reported a year-over-year decline in revenues.
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Looking ahead, financials may also experience improved fundamentals as easier lending standards bolster loan growth.
“Commercial and industrial loan creation has slowed in recent years, dragging down total loan growth. But improving lending standards could reverse that trend and bolster Financials stocks. Loan growth is a key driver for the sector, and can mean the difference between Financials outperforming or trailing the broader market,” according to Fidelity.
For more information on market sectors, visit our sector ETFs category.