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What are we looking for?

Canadian-listed ETFs that appear undervalued based on Morningstar’s fair value analysis

The screen

Last week, Tom Bradley wrote a great article reminding investors about the timeless importance of valuations when investing. In the stock world, there are many ways to value a company, of which Mr. Bradley highlights the use of ratios such as price-to-earnings, which is particularly useful if compared across companies. As a complement, Morningstar favours a bottom-up fundamental approach, which involves predicting the expected cash flows a company will produce a few years into the future and then discounting those cash flows back to today to arrive at a present “fair” value. This discounted cash flow approach is widely used by sell-side research analysts, but experienced investors know that it is far from an objective exercise.

Unique to Morningstar’s equity analyst team is the consistent assessment of “economic moats,” or competitive barriers to entry. There are fives unique sources of economic moats: (1) Switching costs, which are those obstacles that keep customers from changing from one product to another; (2) The network effect, which occurs when the value of a good or service increases for both new and existing users as more people use that good or service; (3) Intangible assets, such as patents, government licences and brand identity that keep competitors at bay; (4) A company with a cost advantage can produce goods or services at a lower cost, allowing them to undercut their competitors or achieve higher profitability; (5) Efficient scale benefits companies operating in a market that only supports one or a few competitors, limiting rivalry. In financial terms, these companies are expected to produce a return on invested capital in excess of their cost of capital (an increasingly relevant measure given that the cost of capital has increased alongside recent interest-rate hikes).

When we aggregate the fair value estimates for individual stocks in the portfolio (taking into consideration their weighting), we are able to see whether a portfolio or fund is trading below its fair value. With this idea in mind, this week I ran a screen across all Canadian-listed stock ETFs that appear undervalued. I screened the universe of roughly 1,400 Canadian-listed ETFs for those that:

  • Received a four- or five-star Morningstar Rating for Funds (also known as the “star” rating), indicating that the fund has historically outperformed respective category peers after fees, on risk-adjusted basis.
  • Received Morningstar Medalist Rating of gold, silver or bronze, highlighting funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision-making).

I then ranked the list of resulting ETFs by the difference between recent close price and Morningstar’s fair value estimate, with the most undervalued ETFs appearing first.

What we found

Undervalued ETFs

NameTickerMorningstar CategoryMER (%)Morningstar Rating for FundsMorningstar Medalist RatingMarket PriceFair Value Estimate% UndervaluedTotal Ret YTD (%)Total Ret 1 Yr (%)Total Ret Annlzd 3 Yr (%)Total Ret Annlzd 5 Yr (%)Total Ret Annlzd 10 Yr (%)Total Ret Annlzd 15 Yr (%)Inception Date
Desjardins RI Em Mkts MF NetZremissionsDRFE-TEmerging Markets Equity0.754 StarsSilver20.8726.2920.6%5.411.71.53.53/7/2019
iShares Emerging Markets Fdmtl ETF CommCWO-NEEmerging Markets Equity0.724 StarsGold35.2643.9119.7%5.210.61.91.95.26.64/7/2009
Mackenzie China A-Shares CSI 300 ETFQCH-NEGreater China Equity0.704 StarsGold77.5192.4316.1%3.7-14.5-11.1-1.92/1/2018
iShares International Fdmtl ETF CommCIE-NEInternational Equity0.734 StarsSilver24.3128.0213.3%7.212.97.96.96.37.92/14/2007
Manulife Multifactor CA SMID Cap ETFMCSM-TCanadian Small/Mid Cap Equity0.574 StarsGold38.9244.8613.2%7.68.36.710.711/27/2017
Manulife Multifactor US Sm Cp ETF UnHMUSC-B-TUS Small/Mid Cap Equity0.514 StarsSilver37.6842.7211.8%3.517.04.97.611/27/2017
Fidelity International Value ETFFCIV-TInternational Equity0.515 StarsSilver34.5439.0011.4%6.017.310.36/5/2020
Vanguard FTSE Emerging Mkts All Cap ETFVEE-TEmerging Markets Equity0.254 StarsBronze34.1438.3411.0%4.38.1-2.51.84.711/30/2011
Manulife Multifactor Em Mkts ETFMEME-B-TEmerging Markets Equity0.744 StarsBronze27.8731.1710.6%3.39.1-1.52.312/4/2018
CI WisdomTree Emerging Markets Div ETFEMV-B-TEmerging Markets Equity0.415 StarsBronze27.7330.709.7%5.114.52.44.29/19/2017
iShares MSCI Europe IMI ETF (CAD-Hedged)XEH-TEuropean Equity0.285 StarsSilver32.5735.919.3%5.89.87.68.07.74/22/2014
Vanguard FTSE Dev ex NA Hh Div Yld ETFVIDY-TInternational Equity0.314 StarsGold30.4633.218.3%7.914.89.77.48/21/2018
iShares Core MSCI EAFE IMI ETF CADHXFH-TInternational Equity0.225 StarsSilver31.6234.448.2%8.416.29.29.12/10/2015
Manulife Multifactor Dev Intll ETF HMINT-TInternational Equity0.515 StarsGold37.5340.868.2%9.017.310.29.44/10/2017
iShares S&P US Mid-Cap ETFXM-TCUS Small/Mid Cap Equity0.164 StarsGold30.3532.887.7%8.418.66.19.78/4/2015
BMO Global Infrastructure ETFZGI-TGlobal Infrastructure Equity0.614 StarsBronze42.1445.627.6%1.0-0.86.45.27.31/19/2010
Mackenzie Maximum Divers Emerg Mkts ETFMEE-TEmerging Markets Equity0.574 StarsGold25.5927.677.5%4.112.0-0.83.01/23/2017
iShares MSCI EAFE ETF (CAD-Hedged)XIN-TInternational Equity0.514 StarsBronze35.9438.727.2%9.415.89.38.87.78.79/6/2001
Mackenzie International Equity ETF CAD HQDXH-TInternational Equity0.195 StarsSilver132.19141.936.9%9.216.69.69.01/29/2018
iShares ESG Aware MSCI EAFE ETFXSEA-TInternational Equity0.284 StarsSilver25.3227.086.5%6.59.75.36.63/18/2019

Source: Morningstar Direct | Data as of April 23, 2024

The top 20 ETFs that qualified in the screen are listed in the table accompanying this article, alongside categories, MERs, trailing performance, inception dates and ratings. Investors are urged to first look at the category to which each fund belongs, given that the rating is meant to measure performance against category peers.

This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 16/04/24 11:59pm EDT.

SymbolName% changeLast
DRFE-T
Desjardins Emerging Mkts Low Co2 ETF
-0.4%22.55
CWO-NE
Ishares Emerging Markets Fundamental Index ETF
-0.16%38.19
QCH-NE
Mackenzie China A-Shares CSI 300 Index ETF
-1.54%79.23
CIE-NE
Ishares Intl Fundamental Index ETF
+0.44%25.14
MCSM-T
Manulife Mulfact CDN Smid Cap Idx ETF
-0.73%39.28
MUSC-B-T
Manulife Mulfact US Scap Idx ETF Unheg
-0.66%37.68
FCIV-T
Fidelity International Value Index ETF
+0.56%35.69
VEE-T
Vanguard FTSE Emerging Mkts All Cap ETF
-0.14%36.31
MEME-B-T
Manulife Multifactor Emerg Mkts Idx ETF
+1.24%29.5
EMV-B-T
CI Wisdomtree Emerging Mkts Div Idx ETF
+0.3%29.69
XEH-T
Ishares MSCI Europe IMI Index ETF
+0.3%33.83
VIDY-T
Vanguard FTSE Dev Ex Na High Div Yld ETF
+0.64%31.44
XFH-T
Ishares Core MSCI EAFE IMI Index ETF
+0.55%32.72
MINT-T
Manulife Mltfactor Dev Intl Hgd ETF
+0.34%38.91
ZGI-T
BMO Global Infrastructure Index ETF
-0.71%43.11
MEE-T
Mackenzie Max Diverse Emg Mkts ETF
-0.74%26.71
XIN-T
Ishares MSCI EAFE Index ETF
+0.51%37.16
QDXH-T
Mackenzie Intl Equity Index ETF CAD Hgd
+0.45%136.66
XSEA-T
Ishares ESG MSCI EAFE Index ETF
+0.65%26.43

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