Ryan Jackson: Even after rebounding early in 2023, most stock ETFs still look undervalued according to the Morningstar price/fair value estimate ratio. This metric divides ETF prices by the aggregate of the qualitative and quantitative fair value estimates for the stocks in their portfolios. It indicates that Vanguard Total World Stock ETF, ticker VT—a proxy for the global market—trades 11% below its fair value.
Today, I’ll highlight four ETFs that trade at even steeper discounts than VT. Furthermore, each ETF earns a Morningstar Medalist Rating of Bronze or better, meaning we think these funds are some of the best available within their respective Morningstar Categories.
4 Highly Rated ETFs on Sale
- iShares Core S&P Small-Cap ETF IJR
- iShares MSCI USA Value Factor ETF VLUE
- Schwab Emerging Markets Equity ETF SCHE
- Dimensional International Value ETF DFIV
Let’s start with iShares Core S&P Small-Cap ETF, which trades under the ticker IJR. This low-cost snapshot of the small-cap market sports a Morningstar Medalist Rating of Silver and trades at a 25% discount.
This fund tracks the S&P SmallCap 600 Index, a market-cap-weighted benchmark whose 600 constituents are selected by an index committee to represent the U.S. small-cap market. Stocks must meet S&P’s profitability and liquidity requirements to be eligible, which introduces a mild quality tilt and can help during market downturns. Still, this fund accurately represents the small-cap landscape and comes with an attractive price tag of 0.06%.
This fund looks cheap because the U.S. small-cap market looks cheap. That may be because smaller firms are more sensitive to economic downturn than their larger peers. But for investors that see a bright future for small caps, IJR is a strong choice.
Next up is iShares MSCI USA Value Factor ETF, ticker VLUE. This Silver-rated strategy trades 22% below its fair value estimate.
This fund follows the MSCI Enhanced Value Index, which selects stocks with the strongest value traits from each sector, then weights them by a combination of those traits and their market capitalization. The index’s sector-neutral approach is what makes it unique. Unlike most value funds that load up on cheaper sectors, this fund’s sector composition mimics the broad market. So, it tends to have a heavier dose of tech and consumer discretionary stocks and a leaner allocation to utilities and financials.
VLUE is a deep-value fund by design, so it’s no surprise to see it trade at a deep discount. The fund tends to be a bumpier ride than most of its peers, but its lean 15-basis-point expense ratio may help some investors stomach the volatility.
Our next fund looks overseas at emerging-market stocks. Schwab Emerging Markets Equity ETF trades under the ticker SCHE and comes at a 23% discount to its fair value.
This fund tracks the FTSE Emerging Index, which covers large- and mid-cap stocks from more than 20 developing nations. That includes China A-shares but not Korean stocks because FTSE classifies South Korea as a developed market. The fund weights stocks by market capitalization, which channels the market’s collective view on each stock’s relative value and dials back turnover.
Much of this fund’s appeal lies in its breadth. Over 1,800 holdings shape this far-reaching portfolio. That helps reduce the geopolitical risk that emerging-markets stocks face, a key concern that explains much of the portfolio’s discount.
The last fund on my list is Dimensional International Value ETF, ticker DFIV. This fund earns a Morningstar Medalist Rating of Silver and trades 18% below its fair value estimate.
This fund targets the cheapest third of foreign developed-markets stocks, which usually translates into about 550 holdings. It starts with these companies’ market-cap weights and tilts toward those with lower valuations and smaller market caps. So, the fund reaps many of market-cap-weighting’s benefits—especially low turnover, in this case—while leaning into the value and small-size factors.
As one of the deepest-value portfolios in the foreign large-value Morningstar Category, this fund tends to be more volatile than most of its peers. However, investors that stuck with this fund have been rewarded. Over the 10 years through May 2023, it beat the MSCI ACWI ex USA Value Index—its category benchmark—by 1.84 percentage points annually.
Watch “3 Great Value ETFs for 2023″ for more from Ryan Jackson.