These are interesting times in the market. It’s hard for investors looking for a mix of attractive value and safety. Usually, safety comes with higher multiples. Just look at the consumer staples and utilities sectors. Though boring, they’re often pricey compared to the broader market.
As for the market being “overvalued,” that’s a matter of perception. The S&P 500 trades around 18.5 times this year’s earnings, up from 15.8 times a year ago. Obviously, that’s a higher multiple, but “overvalued” is up for debate. Additionally, hiding out in value stocks and related exchange-traded funds hasn’t been a winning bet because value has lagged growth for over a decade.
In today’s environment, having your cake and eating it too can be a tricky task. Fortunately, there are still some ETFs to buy that can help investors check both boxes. Here are few examples.
Safe ETFs to Buy: Fidelity MSCI Financials ETF (FNCL)
Expense ratio: 0.08%, or $8 annually on a $10,000 investment.
The Fidelity MSCI Financials ETF (NYSEARCA:FNCL) isn’t as safe as say U.S. Treasury bonds, but its three-year average annualized volatility of 15.6% is palatable even for conservative investors. Moreover, the financials do check the value box. The sector — the third-largest weight in the S&P 500 — remains one of the most undervalued relative to the benchmark.
The $1.1 billion FNCL could be an ETF to buy over the near term simply because there are still some fourth-quarter earnings reports left to come from the sector. On that note, most of what investors have heard so far from big-name FNCL components, such as JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), has ranged from good to downright encouraging.
Adding to the allure of FNCL is the ability of big banks to manage lower net interest margins and the prospect of another round of elevated buybacks and dividends later this year.
“In terms of both household debt and personal savings, we see US consumers as considerably better off than they were prior to the Great Recession; moreover, retail lenders have exhibited greater discipline,” Fidelity said in a recent note.
iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV)
Expense ratio: 0.25%
One of the more prominent themes of early 2020 is that this may finally be the year that emerging markets equities, a group that has been undervalued for some time, outperform U.S. stocks. Those looking to tap that theme may want to do so in less aggressive fashion with a fund like the iShares Edge MSCI Min Vol Emerging Markets ETF (BATS:EEMV).
The $5.6 billion EEMV follows the MSCI Emerging Markets Minimum Volatility Index. And it has lived up to its billing of being less volatile than traditional developing economies ETFs in its more than eight years on the market. That also means EEMV has often been a better buy during some rough patches for emerging markets equities.
Admittedly a less fundamental reason to consider EEMV is the reliability of emerging markets equities. The group has lagged the S&P 500 since 2010 and there are no guarantees that will change this year.
Still, there’s no getting around the fact EEMV is safe relative to its peer group. At 15.7 times earnings, it’s cheaper than the S&P 500.
Invesco S&P 500 Quality ETF (SPHQ)Expense ratio: 0.15%
Want to split the difference between safety and value? Well, there’s quality, an investment factor that exhibits low volatility traits but often commands premium valuations. Although quality usually isn’t cheap, the Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ) remains a compelling idea for 2020.
The fund follows the S&P 500 Quality Index, a collection of S&P 500 members “that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio.”
As highlighted by a more than 30% weight to technology stocks, SPHQ is chock full of profitable companies.
“The market rewarded profitable companies handsomely in 2019. ROE was the best-performing ratio of the three (38.2%), followed by accruals (29.8%), and then leverage (28.1%),” said S&P Dow Jones in a recent note. “In fact, the portfolio of the highest ROE companies outperformed the S&P 500 by nearly 670 bps.”
As of this writing, Todd Shriber did not own any of the aforementioned securities.