Index funds that look under- and overvalued, relative to other index funds.
The screen
The world of passive or index investing has evolved quickly. From traditional region-focused, market-cap-weighted stock indexes to the more exotic “smart beta” ETFs (a hybrid between active and passive management), to those that follow a sector or theme, there is no shortage of options available to the Canadian investor. Given the smorgasbord of different indexes, today I aim to highlight the large discrepancies in valuations, particularly now that market volatility has moved the needle.
To do this, I used Morningstar Direct to screen the universe of Canadian-domiciled ETFs and DIY mutual funds (those that are available through discount brokerages and don’t include a bundled advice fee) for those that invest exclusively in stocks, with the goal to highlight the main price multiples an investor might look at to determine if a portfolio is over- or undervalued. Given that smart beta ETFs may have an inherent and purposeful tilt to value or growth, I’ve excluded these in the analysis. Subsequently, I ranked the 261 remaining index funds across four core multiples (price-to-earnings, price-to-book, price-to-sales, and price-to-cash flow) aggregated at the portfolio level, rewarding those with lower multiples. In the ranking process, I placed an equal weight on all four of the aforementioned price multiples.
Morningstar Direct | Data as of April 17, 2023. *Denotes Analyst Rating
A top and bottom 10 was then created using the sorted list, and is displayed in the accompanying table alongside tickers, MERs, categories, ratings, inception dates and trailing performance results. Notably, a number of funds that happen to fall near the bottom of the list are technology-focused (including those that follow the Nasdaq-100 Index), and a number of passive ESG-tilted indices.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA