ETFs can be great tools in your investing toolbox. They can be cheap, flexible, and tax-efficient. But to benefit from what they have to offer, you must resist "short-termism" and avoid the temptation to pile into the hottest-performing funds.
ETFs are versatile investment vehicles, so there's more than one way to effectively incorporate them into a portfolio. In this ETF Solution, we'll talk about one way investors can opportunistically tap into the best that ETFs have to offer.
Investors can use ETFs as a way to gain exposure to undervalued areas of the stock market. Our equity analysts have placed fair value estimates on 1,500-plus stocks, and by aggregating those fair value estimates, we can also estimate the fair values of dozens of equity ETFs. To determine if an ETF is over- or undervalued, we compare our fair value estimate for the fund with its current market price.
An ETF is likely to get our attention if it is trading substantially below our fair value estimate. By contrast, if it's trading at a premium to our fair value estimate, we'd probably take a pass.
In calculating a margin of safety, it is important to consider all the possible variables including secular trends, macroeconomic themes, and even sector momentum. In our ETF Analyst Reports, you're likely to hear us harp on a few recurring themes--company quality (i.e., "economic moat"), business risk, portfolio diversification, and cost. All of these factors impact the fair value estimate that we place on an ETF and the margin of safety we demand when investing in it.