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Are Stocks Really Overvalued? ETFs to Buy

After a stupendous rally by U.S. equities post Trump’s election, it’s not surprising that investors and market watchers will mull over how highly priced the broader market is. SPDR S&P 500 ETF SPY has gained over 8% in the las six months (as of May 23, 2017). No Fed policy tightening, no geopolitical concern and no Trump-related political uncertainty could hold the market back for long.

Needless to say, many started to wonder whether the price bubble will burst soon. At least, Robert Shiller’s cyclically adjusted price-earning (or CAPE) ratio suggests so. As per CNBC, “the CAPE ratio compares the current level of the market to the last 10 years' worth of reported earnings adjusted for inflation; the idea is to consider corporate earnings power across the breadth of the business cycle.”

Precisely, the S&P 500, is trending toward 30, just a little below its peak before Black Tuesday in October 1929, as per Bloomberg. But instead of fretting about a crash, investors should delve a little deeper as suggested by several other economists and analysts.

Why the Market Valuation May Not be Too Rich

First and foremost, the 10-year trailing earnings figure takes into account massive profit shrinkages related to the 2008–2009 financial crisis. The present earnings picture shows considerable improvement.

If we go by the Bloomberg article, “Shiller himself has noted, valuations per se have little predictive power in the short run. Expensive markets can get more expensive. What matters instead is the near-term outlook for earnings.”

As per the Earnings Trends issued on May 18, first-quarter 2017 earnings are expected to expand 12.9%. Around 92.6% of stocks reported so far have registered a 72.6% earnings beat ratio. The upcoming quarters’ earnings growth are 5.8%, 6.2%, 9.8% and 8.9%, respectively.

All in all, our belief that market is richly valued but unlikely to face a steep crash in the coming days is shared by many. Investors can definitely cash in on the solid earnings momentum but with a little caution. Political worries – be it failure of Trump’s policies, the election in Europe or Brexit – can be critical to the markets and lead to occasional selloffs.

Below we highlight a few ETFs that may help investors to navigate this tricky situation.

iShares S&P 500 Growth IVW

The fund follows the S&P 500 Growth Index and tracks the performance of the large capitalization growth sector of the U.S. equity market. Though Q1 U.S. GDP growth came in muted, Atlanta Fed raised the second-quarter GDP growth outlook to 4.1%, which indicates upbeat economic momentum and a case for growth investing (read: 7 Large-Cap Growth ETFs That Are Sizzling).

Goldman Sachs ActiveBeta US Large Cap Equity ETF GSLC

The $2.08-million fund is designed to deliver exposure to equity securities of large-capitalization U.S. issuers. The fund is heavy on IT (22.9%).

iShares Core Aggressive Allocation AOA)

This fund has an aggressive risk outlook but with considerable diversification. It takes a fund-of-funds approach. Over 80% of the basket is invested in equities and the remaining in bonds. The U.S. (55.06%) gets the highest exposure, followed by Japan (8.5%) and U.K. (5.2%). Investors should note that the earnings picture and economic backdrop have lately improved exponentially in the several foreign economies.

Pacer Global Cash Cows Dividend ETF GCOW

The product looks to track the Pacer Global Cash Cows Dividend Index to provide exposure to global companies with high dividend yields supported by a high free cash flow yield. The fund is heavy on the U.S. (35.7%) followed by the U.K. (10%). The fund yields 2.54% annually (read: 4 ETFs to Profit Out of Cash Kings).

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-SP500 GR (IVW): ETF Research Reports
PACR-GL CC DIV (GCOW): ETF Research Reports
ISHARS-AG AL (AOA): ETF Research Reports
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