Exchange-traded funds (ETFs) are growing exponentially in terms of their popularity. According to data from Statista, the value of assets held in ETFs worldwide reached almost $10 trillion in 2022. The number of ETFs available to investors worldwide is also growing dramatically, rising from 276 in 2003 to 8,754 in 2022. This has led to the rise of undervalued ETFs.
The popularity of ETFs is due to many factors, including low fees, sector diversification, and the ability to track specific indexes or parts of the stock market. ETFs also help to mitigate risk and volatility and are generally seen as safer bets than putting money into individual stocks.
For the most part, ETFs are passively managed compared to mutual funds that are actively managed by an individual or team of fund managers. And, ETFs have a track record of providing better returns than mutual funds and other actively managed investments.
So, what’s not to like? Here are the three most undervalued ETFs to buy in September 2023.
SPDR Dow Jones Industrial Average ETF Trust (DIA)
Among the three major U.S. indices, the Dow Jones Industrial Average has been the laggard this year, having only risen 5% compared to a 17% gain in the benchmark S&P 500 and a 34% increase in the technology filled Nasdaq index.
There’s clearly a catch-up opportunity with the Dow Jones Industrial Average, which is comprised of 30 of the biggest blue-chip stocks in America, including Apple (NASDAQ:AAPL), McDonald’s (NYSE:MCD) and Visa (NYSE:V).
The SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA) is a great way to gain exposure to all 30 stocks in the Dow. This exchange-traded fund holds all 30 stocks that comprise the Dow Jones Industrial Average in the same weighting as the index itself and it mirrors the performance of the Dow exactly. This ETF pays a quarterly dividend that yields a healthy 2.11% and its expense ratio is just 0.16%, making it fairly inexpensive to own. All told this is a great way to play a leading U.S. index and gain broad sector exposure. It also makes it one of those undervalued ETFs.
Energy Select Sector SPDR Fund (XLE)
Oil prices are hovering near a 10-month high and flirting with $90 a barrel. As the sector stages a recovery, a good option would be the Energy Select Sector SPDR Fund (NYSEARCA:XLE).
This can be a great way to play the resurgence of oil and natural gas stocks, which have been down this year after record profits seen in 2022. Top holdings in this ETF include leading energy companies such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and Occidental Petroleum (NYSE:OXY), to name only few of the fund’s total of 23 holdings.
Other reasons to consider the XLE ETF are the low expense ratio of 0.10% and a dividend yield of 4.13%. Oil and natural gas companies pay some of the highest dividends in the S&P 500 index and that fact is reflected in the Energy Select SPDR Fund. With some analysts now predicting that crude oil prices will again test $100 a barrel, the outlook for oil and gas stocks is suddenly bullish. While betting on individual stocks can be risky, spreading that risk across a diverse number of holdings through an ETF like this can help to increase the odds of gaining from the renewed success of the energy sector.
Vanguard Small-Cap Index Fund ETF (VB)
Another sector that has lagged the market this year are small-cap stocks. As the market rally broadens out to eventually include small and medium-sized stocks, a great option would be the Vanguard Small-Cap Index Fund ETF (NYSEARCA:VB). This exchange-traded fund tracks the performance of the CRSP U.S. Small Cap Index, which measures the investment return of small-capitalization stocks.
Holdings in the fund include companies such as Fair Isaac Corp. (NYSE:FICO) and Targa Resources (NYSE:TRGP). Year to date, the VB ETF has gained 8% and it’s up nearly 20% over five years.
Known worldwide for its low fees, the Vanguard Small-Cap Index Fund ETF charges a rock bottom expense ratio of 0.05%. Like the other ETFs on this list, VB pays a decent dividend of 76 cents a share per quarter, giving it a yield of 1.67%. The combination of low costs, high yield, and diversification make this ETF ideal for investors who want broader exposure and to round out their portfolio to ensure they capture all segments of the market. The VB ETF is also diversified in terms of its sector exposure with holdings that cover everything from energy and healthcare to real estate and finance.
On the date of publication, Joel Baglole held long positions in AAPL and FICO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
