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Fund Spy

ETFs: the Cheap, the Dear, and the Fairly Valued

Here's an update on funds our stock analysts would and wouldn't buy now.

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A recent look at the valuations of the holdings of some domestic-equity exchange-traded funds has produced some interesting results.

Despite all you hear about the cooling (or crashing, depending on who's talking) housing market, ETFs that track homebuilders are trading well below the aggregate fair values of their portfolios, according to Morningstar's stock analysts. Furthermore, due to steep declines in hardware stocks, large-growth ETFs are trading lower than they have in a while, relative to their overall fair values. Meanwhile, the most overvalued ETFs were real estate offerings, such as  iShares Cohen & Steers Realty Majors (ICF), and energy funds, particularly iShares Dow Jones U.S. Oil Equipment Index  (IEZ), which tracks the shares of drilling gear makers.

These observations come from Morningstar's price/fair value measure, which I've written about before, but here's a quick review: Morningstar has 90 equity analysts using bottom-up analysis and dividend discount models to come up with fair values for about 1,800 stocks. For ETFs that own a lot of the stocks we cover, we roll up the fair values and market prices of those companies and compare the two numbers. The result is a ratio that should give you an idea of whether the ETFs' underlying portfolios are undervalued, fairly valued, or overvalued.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.