I know that value investing is considered dead in many circles and it's easy to understand why. Over the past decade since the recovery from the financial crisis, investors have almost entirely focused their energy and dollars on large-cap growth stocks. Small-caps, utilities, low volatility, international and value stocks have all lagged this group substantially in recent years.
2021 has been all about the global economic recovery from the COVID-19 pandemic. Growth has still been producing gains, but the year-to-date leaders overall have been cyclical recovery plays, including small-caps and, yes, value stocks!
With COVID cases rising again, additional lockdowns being threatened and an uncertain timeline as to when we'll be back to life as normal, cyclicals have begun taking a back seat again.
But if we take a longer-term view, we know that we'll eventually move past this pandemic and that should be a good thing for value and international stocks once more. Right now, some sectors of the market are so undervalued that they're actually trading for less than what they're actually worth. Some segments are more prone to trading at perpetually cheaper valuations, such as emerging markets and banks, but when the portfolios actually trade for less than book value, there's a mean reversion aspect at play that can help produce especially outsized returns.
There are actually a good number of ETFs out there right now trading at P/B ratios of less than one, but I want to highlight 10 of the most intriguing ones in the market today. If you're a fan of cyclical recovery plays and get an attractive level of value for your investment, this list is a good place to start. Most have already produced double digit gains this year and could be at interesting entry points. Hat tip to ETF Action for the data.
Let's break down these ETFs by category.
Emerging markets stocks and ETFs are almost always cheaper than U.S. stocks, usually be a fairly wide margin. On a trailing 12-month basis, emerging markets are trading at more than a 30% P/E discount to the S&P 500. A discount that are large has historically signaled a high likelihood of outperformance over the S&P 500 in the coming 5-10 years, so this could be an especially attractive buying opportunity for this beaten-down group.
The Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE) is easily the largest of this group although its 0.39% expense ratio is a little un-Schwab-like given how many other of its offering are cheaper than 0.10% annually. It's good, however, for broad emerging markets exposure. The First Trust Emerging Markets AlphaDEX ETF (FEM) takes a more analytics-based approach to security selection. The VictoryShares USAA MSCI Emerging Markets Value & Momentum ETF (UEVM) takes a more thematic approach and adds a momentum screen. The Global X MSCI Greece ETF (GREK) would be your choice for individual country exposure.
With the mortgage market being littered with defaults and forbearances, especially in the retail space, it's not surprise that REITs were one of the hardest hit areas of the economy. Even though many have bounced back to some degree, REITs focused on residential & commercial mortgages as well as retail continue to struggle.
If you're looking for both value and yield in a recovery play, this might be the place. The iShares Mortgage Real Estate ETF (REM), the Invesco KBW Premium Yield Equity REIT ETF (KBWY) and the VanEck Vectors Mortgage REIT ETF (MORT) all come with yields north of 6%, but will be especially risky as the economy recovers.
Banks and other financials have been cheap for a while as interest rates have continued to decline helping to squeeze margins. With rates on the rise again and the economy continuing to show progress, there's a longer-term case to be made for the financial sector again.
The iShares MSCI Europe Financials ETF (EUFN) is an interesting choice if you're a risk seeker. This ETF has lagged the U.S. financial sector for some time and we've seen significant liquidity risks from the likes of Deutsche Bank and Credit Suisse. However, if you believe this institutions can survive these short-term risks, there's big return potential if you can handle the risk.
The SPDR S&P Insurance ETF (KIE) currently has a 42% exposure to property & casualty insurers and 27% to life & health insurance providers, so there's a fair amount of macro sector risk in this portfolio.
While each of these ETFs is cheap based on traditional valuation metrics, most are cheap for a reason. They're risky because they're heavily exposed to any number of industry and economic risks. I think it's important to consider these longer-term holdings if you're interested in adding them to your portfolio. Give these a little time to play out, which could logically take a year or longer. With the timeline of the global recovery in some doubt, it's important for investors to be patient with these ultra-cheap plays.