How Low P/E ETFs Can Become Less Risky
So how might you protect yourself? For starters, you must recognize that cheap can always get cheaper. You could have purchased the Nasdaq 100 (QQQ) 60% off of its 120 high at a price point of 50 in 2001, yet that would not have prevented further downside of another 60% as QQQ dropped from 50 to 19 over the remainder of the 2000-2002 bear market. Stop-limit loss orders can help one minimize the possibility of cheap turning into a disaster. Similarly, resolving to purchase assets that have established intermediate-term (100-day) and/or long-term (200-day) technical uptrends also increases the probability that you are making a well-reasoned decision.
For instance, Market Vectors Africa
(AFK) has a trailing 12-month P/E of 12. Is it a bargain? Is it less risky than the name itself might otherwise dictate? Perhaps. The current price is not far from where it was a year ago. The price is also above both its 100-day as well as its 200-day moving average. Moreover, the 100-day recently crossed above the 200-day, a phenomenon that many technical analysts believe to be quite bullish. On a P/E of 12 alone, I would not be inclined to consider this exchange-traded tracker. With its recent price movement, however, Id have greater confidence in this funds capital appreciation potential.
In contrast, a number of estimates place the forward P/E for iShares MSCI Brazil (EWZ) at 11. That might be considered a steal at a 33% discount to the S&P 500. Yet from my vantage point, the recent inability of EWZ to hold either its long-term (200-day) trend line and/or its intermediate-term (100-day) trend line are reasons enough to look elsewhere. Efforts to catch a falling knife rarely pan out.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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