According to the article, Buyside Research scores ETFs for valuations based on P/E ratios and high earnings growth.
They currently believe that IWM, MDY and DIA are not compelling values. They do give high scores (which is a good thing) to XLE, SPY, IYG, XLB, XLI and IGE.
I’m not sure this is the best way to assess ETFs. ETFs, for the most part, track indices. P/E ratios have a poor record for predicting moves in the broad stock market. The Russell 2000 and the S+P 500 are both pretty broad measures of the market. P/E ratios were high for years as the bubble inflated. There are also long periods in market history that have had low P/E ratios but where stocks did not do well.
P/E ratios can be useful for comparing one stock with a similar stock as one of several measures of valuation but I would not rely on this method to guess where the market is going. If you have been reading this blog for a while you may have noticed that I have never talked about P/E ratios as a determinant for the entire market.
Another thing that I must be missing is how SPY scores well in their method but DIA does not. The extent to which they are correlated ebbs and flows, but as the chart shows the two trade similarly.
I would not doubt that I would lose a debate on the matter but I just don’t think this method can work well in the manner it is being applied.
3 comments:
new to your blog and have enjoyed the experience:
You expressed a general POV and one that I happen to share. I have been struggling myself, however, in the quest of infinite investment knowledge and looking at situations from varying perspectives -- to find a way to look at ETF's in another way.
A more direct quant method for ETF analysis -- not so much market timing but sector timing, if you will.
I attempted to find an idea of your own macroeconomic indicators: http://randomroger.blogspot.com/2005/08/big-picture-for-week-of-august-21-2005.html
...some great ideas but more of a industry knowledgeable approach then a textbook one.
Any thoughts?
Frank,
I'm sorry but I'm not sure what your question is. Feel free to clarify here and I will take a shot at it.
The article on Buyside Research outlines a quantitative analysis method regarding ETFs -- one in which you note "Not How I Would Do Things".
Essentially what would be the way you would do things? I looked through your archives in search of a more clear analysis methodology -- all I could find was the "Big Picture" post on August 15, 2005. What you talk about in this post could be used towards ETF analysis, however, is not directly correlary with traditional quant methods, more qualitative. What comes to mind regarding this more textbook analysis approach towards ETF analysis in your mind?
Thanks for your time and and candor.
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