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Our Picks

10 Attractive ETFs

These exchange-traded funds could achieve returns of 15% or more.

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Based on our equity research, the overall market is trading roughly in line with fair value. The S&P 500 Index, for example, is trading about 4% less than fair value, and the Dow Jones Industrials about 6%. But several pockets of the market trade at much steeper discounts, and one way to gain instant exposure to those areas is through ETFs.

To create the list of the cheapest ETFs you see below, we first screen for those where we have fair value estimates on at least 80% of the stocks in the portfolio (on an asset-weighted basis). We throw out any ETFs for which our portfolio dates are older than 45 days. Then we take the 10 funds with the lowest price/fair value ratios.

ETFs that focus on financial stocks dominate the list, which isn't surprising, given how our financials team has been pounding the table on the bargains they see in their sector. The cheapest, KBW Bank ETF (KBE), trades for 83 cents on the dollar, assuming of course that our fair value estimates for the underlying banks held in the portfolio are correct. It's no coincidence that Sonya Morris, who runs two ETF portfolios in our ETFInvestor newsletter, holds a position in the fund. (For more from Sonya, see her take on five of the most popular new ETFs.) Several consumer-related ETFs also dot the list, thanks to 5-star holdings such as  Time Warner (TWX),  Home Depot (HD), and  Sears Holdings (SHLD).

Haywood Kelly, CFA has a position in the following securities mentioned above: TWX. Find out about Morningstar’s editorial policies.