ETFs can be used to diversify one’s holdings across several markets or industries. There are tons of ETFs suited for your investment palette. There are sector ETFs, market ETFs, dividend ETFs, small-cap ETFs, mid-cap ETFs, value small-cap ETFs, among others. ETFs suit passive investors more as they like to just buy and hold and not monitor the markets. Active investors might not prefer ETFs as they can’t get their hands “dirty” by buying ETFs and it takes the fun out of investing most of the time. Historically, ETFs have provided decent returns of 5% to 12% as the earnings rise overall due to inflation, population growth, technological advancements and affluence.
Since Asia is where the next phase of growth is going to take place, one can invest in ETFs that have holdings in Asia. For example, there are ETFs that centre around China. There is the FTSE/Xinhua China 25 Index Fund (ticker: FXI) and PowerShares Golden Dragon Halter USX China Portfolio (Fund) (ticker: PGJ) which are ETFs which invest in Chinese stocks. FXI has lesser number of stocks and financials make up almost 46% of its holdings. Meanwhile, PGJ is more diversified across the various sectors in China. I personally prefer PGJ due to its diversification. FXI is also good because its has majority holdings in the financial and telecommunication sectors. These are essential for a booming economy like China.
One can also invest in the US markets by buying the SPDR S&P 500 ETF (ticker: SPY). This is a favourite among traders due to its high liquidity. The last I heard from a trader was that SPY has the highest volume every day. Passive investors can buy this ETF if they feel US will still be the big brother of this world. In fact, the top few companies (as percentage holdings) held by SPY are well-known names Exxon Mobil, Apple, Microsoft, P&G, AT&T, GE and J&J. These companies will not die out as they produce some of the top products consumed by consumers worldwide. SPY is well-diversified across several industries and sectors as well. Instead of doing sector ETF investment, one can buy SPY and lessen the risk of doing sector ETF investment. Even though the returns will be smoothed out, it provides lesser risk with instant diversification.
For investors who believe in Singapore, there is the Straits Times Index ETF (or STI ETF for short). It invests in the 30 companies of the STI index.
To see if an index is undervalued currently, I use Bloomberg. First, one has to register oneself to access the portfolio. Registration is free. Once registered, you can add the different indexes to your portfolio and check out its performance, P/B ratio and P/E ratio. A screenshot of the Bloomberg account is shown below.
If the P/E of an index is below 17, the index is undervalued. Historically, P/E of 17 is the average P/E. Anything above 25 is overvalued. Before the dot com crash in 2000, the P/E was in the whooping 40s! And remember that anything going up or dropping like crazy, will always come back to its mean.
Take a look at http://www.multpl.com/ for the average P/E. The image below shows the average P/E also.
Currently, the S&P index is carrying a P/E of 14.7. The STI’s P/E is at 12.1. Thus, I feel the indexes are undervalued. China demands a higher P/E due to higher growth. The Shanghai Composite Index P/E is currently at 18.4.
(P/E chart courtesy of http://bigpicture.typepad.com/comments/2005/12/pe_vs_sp_500_50.html)