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Fund Spy

ETFs for Your Watch List--and Some to Avoid

Here is an update on ETF valuations.

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Here at Morningstar, one way we evaluate an exchange-traded fund's attractiveness is by examining the valuation characteristics of the underlying holdings. A handy tool for that task is the price/fair value ratio, which is based on the stock fair value estimates that are produced by Morningstar equity analysts. To compute the ratio, we calculate the aggregate market price for the ETF's underlying holdings and divide that number by the asset-weighted fair value estimate of those stocks. A price/fair value ratio above 1.0 indicates that an ETF is overvalued because its market price exceeds the collective fair value estimate of its holdings. By the same token, a price/fair value ratio below 1.0 suggests that the ETF is cheap.

The price/fair value ratio is made available each month to subscribers of Morningstar ETFInvestor. (To learn more about our newest monthly publication, click here.) But because there are also lessons here for fund and stock investors, we occasionally update our analysis for Web readers as well. We concentrate our analysis on those ETFs with at least two thirds of assets under coverage by Morningstar equity analysts.

Many of the same themes persist since the last time we visited this topic. If anything, the market appears more fairly valued almost across the board. Nevertheless, there are a few undervalued and overheated areas that are worth noting.

Sonya Morris does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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