Sweta Killa: The U.S. stock market showed an impressive turnaround after six days of brutal losses, which threatened the six-year bull market and sent the major bourses into the correction territory. Most of the rally came after the Fed officials signaled that the September rate hike is less likely given the China turmoil, falling oil prices, and weakness in emerging markets.
All these suggest that the economy is on a firmer footing and could easily withstand the China slowdown or global growth worries. Further, accelerating job gains, an improving housing market, rising consumer and business spending, increasing consumer confidence and cheap fuel continue to spur economic growth in the second half of the year. This in turn would propel the stock market higher.
As the U.S. economy is gaining momentum, last week’s steep decline charged up investors to snap up stocks on the cheap, though they remained wary over the uncertainty of the Fed policy. There are several stocks and ETFs that have been selling at a bargain price and investors could definitely look to these products for outsized gains over the longer term. While investing in individual stocks is certainly an option, a basket approach via ETFs could make one’s portfolio highly diversified.
How to Find Bargain ETFs?
Using our database, first we selected the ETFs with a Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). This is because these ranks suggest strengthening fundamentals and superior weighting methodologies that could allow them to lead higher than their cousins in the booming market. Then we shortlisted the funds having lower P/E ratio than the broad market fund (NYSEARCA:SPY), expense ratio of less than 0.50% and dividend yield of at least 2%. Notably, SPY is currently selling at P/E of 17.39.
Finally, we added diversification as the frosting, taking concentration risk of less than 10% (with the help of fidelity.com screener) so that the returns of the fund’s portfolio does not depend much on the performance of a single stock.
Here are the five desirable ETF picks that could be incredible options for an investor’s portfolio over the longer term:
SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA:XES)
This fund targets the energy sector by tracking the S&P Oil & Gas Equipment & Services Select Industry Index. It offers equal weight exposure across 46 securities with concentration risk of 6.7%. The product puts heavy focus on equipment and services at 73.5%, while drilling companies account for the remainder. The fund has amassed $173.3 million in its asset base while sees solid volume of more than 422,000 shares a day. Expense ratio came in at 0.35%. The ETF is currently selling at a P/E ratio of 12.30 and has an annual dividend yield of 2.62%. It has an ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.
This fund provides exposure to the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $265.8 million in its asset base while trades in moderate volume of about 93,000 shares. The ETF charges 45 bps in fees per year from investors. Holding 51 securities in its basket, the product is highly diversified across each component with concentration risk of 5.3%. However, utilities accounts for one-fourth of the portfolio, closely followed by real estate (23%), energy (13%) and consumer staples (12%). The fund is currently trading at P/E of 12.64 and has a high annual dividend yield of 7.38%. It has an ETF Rank of 3 with a Medium risk outlook.
iShares Morningstar Small-Cap Value ETF (NYSEARCA:JKL)
With AUM of $370 million, this product targets the small cap value segment of the broader U.S. market. It tracks the Morningstar Small Value Index and holds a large basket of 247 stocks with minimal concentration risk of 3.2%. From a sector look, financials take the top spot at 40.1% while consumer discretionary (12.2%), industrials (11.9%) and utilities (11.3%) round off the next three. The ETF charges 30 bps in annual fees and trades in light volume of about 11,000 shares a day. JKL currently has P/E of 13.46 and dividend yield of 2.84%. The fund has an ETF Rank of 3 with a Medium risk outlook.