Evaluating ETFs: The Cheap and The Overvalued

Sonya Morris for Morningstar reports that an ETF should be judged by the valuation characteristics of its underlying holdings.

One key indicator is the price/fair value ratio. To compute the ratio, they calculate the aggregate market price for the ETFs underlying holdings and divide that number by the asset-weighted fair value estimate of those stocks. Above 1.0 equals overvalued, where market price exceeds fair value and under 1.0 says the ETF is cheap.

The Cheap:

iShares S&P 100 (OEF)

iShares S&P 500 (IVV)

Rydex Russell Top 50 (XLG)

SPDR DJ Global Titans (DGT) (in relation to small and mid-cap stocks.)

The Overvalued:

iShares Dow Jones US Oil Equipment Index (IEZ)

SPDR S&P Oil & Gas Equipment & Services (XES)

Market Vectors Gold Miners (GDX)