When Wall Street professionals talk about cheap investments, they don’t mean low-priced securities. In fact, a stock, mutual fund or exchange-traded fund with a low share price might be very expensive when measured by other metrics, such as earnings per share, price-to-book ratio or net asset value.
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Cheap in investment industry jargon refers to the value of a security relative to its fundamentals, its peers, the market, and its prospects for future revenue, earnings and growth.
Exchange-traded funds, or ETFs, are popular investment vehicles because they provide investors with professional management and a high level of diversification. They can have dozens of stocks or bonds in their portfolios, but they trade on major exchanges every business day just like individual stocks.
We looked at the universe of ETFs and compiled this list of eight cheap ETFs you should think about buying now:
| ETF | Expense ratio | Dividend |
| iShares U.S. Treasury Bond ETF (ticker: GOVT) | 0.05% | 2.7% |
| SPDR S&P Bank ETF (KBE) | 0.35% | 2.8% |
| Schwab 5-10 Year Corporate Bond ETF (SCHI) | 0.03% | 4.3% |
| iShares Global Energy ETF (IXC) | 0.44% | 3.5% |
| Franklin Senior Loan ETF (FLBL) | 0.45% | 8.4% |
| SPDR ICE Preferred Securities ETF (PSK) | 0.45% | 6.4% |
| iShares S&P Small-Cap 600 Value ETF (IJS) | 0.18% | 1.5% |
| Global X Interest Rate Hedge ETF (RATE) | 0.47% | 4.8% |
iShares U.S. Treasury Bond ETF (GOVT)
GOVT is a straightforward government bond index fund that tracks the ICE U.S. Treasury Core Bond Index and owns Treasury securities with maturities between one and 30 years.
Government bonds may not seem like a very exciting asset class, but their interest and principal payments are backed by Uncle Sam, and some experts believe they’re highly undervalued. That’s precisely why GOVT tops our list of cheap ETFs.
Price-wise, bonds have an inverse relationship with interest rates, meaning when rates go up bonds tend to go down. Conversely, when rates fall bonds tend to rise. As we are all aware, interest rates have been rising for much of the last two years because of the Federal Reserve’s battle with inflation. With inflation subsiding, rates may be poised to fall.
If rates are indeed at a high point, it follows that GOVT is at a low point. GOVT has an expense ratio of just 0.05%, features a monthly dividend payment and has a 12-month yield of 2.7%.
SPDR S&P Bank ETF (KBE)
With the notable exception JPMorgan Chase & Co. (JPM), bank stocks have struggled during the period of high rates and high inflation that we’ve all been living through. The underperformance of banks as an asset class accounts for KBE’s inclusion on our list of cheap ETFs.
KBE is an index ETF that attempts to mirror — minus its expense ratio of 0.35% — the performance of the S&P Banks Select Industry Index, which is an important component of the S&P Total Market Index. In sympathy with the index, KBE is down about 23% over the last two years. That is poor performance, but the tide may be turning, and KBE might be a bargain right now. No one can predict the future, but if lower inflation and falling interest rates are in our economic future, it will be good for the economy and good for KBE.
KBE has more than $2 billion in assets under management, holds 91 separate bank stocks and has a 12-month yield of 2.8%.
Schwab 5-10 Year Corporate Bond ETF (SCHI)
SCHI is a fixed-income ETF that represents excellent value right now and a significant opportunity going forward. This ETF tracks the Bloomberg US 5-10 Year Corporate Bond Index, which is a comprehensive index of more than 2,000 domestic, publicly traded bonds with maturities ranging between five and 10 years.
SCHI has earned a place on our list for some of the same reasons we included GOVT above. Namely, the potential for capital appreciation if rates fall during the upcoming year. SCHI, however, offers investors a somewhat higher yield, great diversification and targeted exposure to the intermediate range of the yield curve.
The current 12-month yield of SCHI is 4.3%. The ETF invests in bonds of varying credit quality, but — based on the middle rating of Moody’s, S&P and Fitch — 48% are rated A or above and none are rated below BBB. In other words, SCHI is not a high-yield, junk-bond fund.
Another good reason to consider SCHI is its very low 0.03% expense ratio.
iShares Global Energy ETF (IXC)
iShares, managed by BlackRock Inc. (BLK), is one of the most popular families of ETFs on the market, and IXC is one of its biggest value plays right now. Crude oil futures traded as high as $118 a barrel on June 3, 2022, but they have since plummeted to about $72 a barrel today. Energy stocks and energy ETFs like IXC followed suit. IXC certainly qualifies as a cheap ETF and right now may be the best time to invest in it.
IXC owns the oil and gas companies that make up the S&P Global 1200 Energy Index. The ETF, which currently has 52 holdings, takes a global sector approach and gives investors exposure to energy stocks from around the world.
The stock market — as represented by the S&P 500 — has returned over 11% for investors over the last three months. Over that period, IXC lost almost 2% despite a strong economy and moderating inflation. This is the core of the value proposition for the energy sector in general and IXC in particular.
IXC has a 12-month yield of 3.5%, which helps offset its expense ratio of 0.44%. Investors should also know that IXC can invest in futures, options and swap contracts, which makes it an aggressive ETF.
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Franklin Senior Loan ETF (FLBL)
FLBL is not a typical fixed-income ETF, but it should perform well over the coming months and deserves a spot on our list. FLBL is in a class of ETFs known as bank loan funds. Bank loan funds buy and hold senior, floating-rate loans that are particularly attractive to investors who think interest rates could fall.
Floating-rate loans are tied to benchmark interest rate indicators such as the London Interbank Offered Rate (LIBOR). In practical terms, this means that if rates fall this year — as many experts think they might — the rates on the loans held in FLBL will adjust downward in sympathy. The result is that bank loans and bank loan ETFs are less rate sensitive than government or corporate bonds or bond ETFs.
When interest rates fall, the demand for floating-rate bonds can rise. Shareholders in FLBL could see substantial capital appreciation in the near future. This is on top of the excellent 12-month yield of 8.4% that the fund currently pays. The fund is managed by bank loan specialists at Franklin Resources Inc. (BEN). It carries an expense ratio of 0.45%.
SPDR ICE Preferred Securities ETF (PSK)
Preferred stocks are different from bonds, but they share some important characteristics with traditional fixed-income securities. Preferred stocks pay a predetermined dividend to shareholders. Investors buy them like regular stocks, but they don’t get voting rights or equity.
Like bonds, preferred stocks move in the opposite direction of interest rates. When rates go down, preferred securities go up, and vice versa. The precipitous rise in interest rates over the last few years caused a corresponding drop in preferred stocks, which turned PSK into a cheap ETF with excellent growth potential.
PSK is in the very popular SPDR family of ETFs that’s managed by State Street Global Advisors. It has over $824 million in assets and is designed to track the cap-weighted ICE Exchange Listed Fixed & Adjustable-Rate Preferred Securities Index. The fund provides good diversification across the financial, utilities, real estate, communications and consumer discretionary sectors.
The expense ratio is 0.45%, and the 12-month yield is a respectable 6.4%.
iShares S&P Small-Cap 600 Value ETF (IJS)
Rather than reading research reports and scouring the market for small-cap value stocks yourself, sometimes it’s better to let the experts do the work for you. That’s precisely the idea behind investing in IJS.
IJS is a $7 billion ETF that seeks to track the S&P Small-Cap 600 Value Index. As its name implies, the ETF invests in relatively small companies that are thought to be undervalued compared to their peers. Almost by definition, IJS is a perpetually cheap ETF that firmly belongs on our list.
IJS has a 12-month yield of 1.5%, but it shouldn’t be considered an income ETF. The main reason for buying IJS is the relative value of the small-cap stocks in the underlying index. In other words, it’s a high-quality but cheap fund.
The fund trades over 830,000 shares a day, giving investors ample liquidity. Also, at 0.18%, the expense ratio is lower than you might imagine for a small-cap ETF.
Global X Interest Rate Hedge ETF (RATE)
The last ETF on our list might be the most interesting and is the most aggressive. RATE is a cheap ETF, but it shouldn’t be purchased by conservative investors who don’t like volatility.
The experts who think interest rates are heading down soon may be right, but what if they’re wrong? RATE is an ETF designed to protect investors and allow them to profit in just that scenario. RATE invests in sophisticated options contracts that do very well when long-term interest rates go up unexpectedly. Specifically, the portfolio managers at Global X buy long put options and swap contracts on U.S. Treasury bonds and Treasury futures.
Because most people believe rates will be stable or go down soon, RATE is out of favor and subsequently has become quite cheap. But, no one really knows which way rates are going to move. While it’s true that inflation is down from its peak, it’s also true that it’s still above the Federal Reserve’s target of 2%. Even if it’s not likely, it’s possible that rates rise again before they fall. If that happens, investors in RATE will be very happy that they own this innovative ETF.
RATE has a total expense ratio of 0.47%, making it the most expensive ETF on our list, but it is not out of line for such a sophisticated ETF.
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8 Cheap ETFs to Buy Now originally appeared on usnews.com
Update 01/08/24: This story was previously published at an earlier date and has been updated with new information.
