The word “cheap” can have a negative connotation. Often it can mean something is shoddy or of poor quality, but not on Wall Street.
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When Wall Street pros talk about cheap securities, they don’t mean bad or even low-priced. The best investors know that a low-priced mutual fund, exchange-traded fund (ETF) or stock can actually be quite expensive when measured by other market metrics such as price-to-book, price-to-earnings or net asset value. In investing terms, cheap equals value. Specifically, value relative to market and industry fundamentals in relation to its future sales, earnings and other financials.
Most investors are familiar with ETFs. They’re popular because they offer investors diversification and professional security selection in a single investment that’s easy to buy, hold and sell.
Below you’ll find a list of seven cheap ETFs that offer investors significant value in today’s market:
| ETF | Expense Ratio | Dividend Yield |
| iShares U.S. Treasury Bond ETF (ticker: GOVT) | 0.05% | 2.9% |
| iShares Mortgage Real Estate Capped ETF (REM) | 0.48% | 10.1% |
| Invesco Financial Preferred ETF (PGF) | 0.56% | 6.4% |
| iShares S&P Small-Cap 600 Value ETF (IJS) | 0.18% | 1.6% |
| Vanguard Value Index Fund ETF (VTV) | 0.04% | 2.5% |
| Vanguard Mid-Cap Value Index Fund ETF Shares (VOE) | 0.07% | 2.2% |
| SPDR Blackstone Senior Loan ETF (SRLN) | 0.70% | 8.8% |
iShares U.S. Treasury Bond ETF (GOVT)
GOVT is a basic U.S. government bond index fund designed to replicate the performance of the ICE U.S. Treasury Core Bond Index. This fund owns long-term Treasury securities with maturities between one and 30 years. The fund has $25 billion in current assets.
While government bills, bonds and notes might seem boring to some people, the interest they pay and the return of principal is 100% guaranteed by the full faith and credit of the U.S. government. They are among the safest investments anyone can own. But, that’s not the only reason they are on this list.
High-quality bonds react very predictably to fluctuations in interest rates. When rates go up, bond prices go down. Conversely, when rates fall, bonds rise. Stubborn inflation has complicated the interest rate environment, but the fact remains that the next move in rates is very likely to be down rather than up.
If and when rates start to drop, the share price of GOVT should react favorably. By that standard, GOVT may be very cheap indeed.
The fund has an low expense ratio of 0.05% and a 12-month yield of 2.9%.
iShares Mortgage Real Estate Capped ETF (REM)
It’s reasonable to consider REM a cheap ETF when we look at it from a relative value standpoint. REM is a mortgage REIT (mREIT) with an exceptionally high dividend yield. The fund’s trailing-12-month yield stands at 10%. REM tracks the well-known FTSE Nareit All Mortgage Capped Index. The fund’s expense ratio is 0.48%, which helps REM avoid tracking error. REM has current assets of over $587 million.
REITs are not bonds, but REM holds residential and commercial mortgage bonds, and REITs do share some important characteristics with bonds. Notably, they have an inverse relationship with interest rates. In other words, when rates fall, REITs tend to rise just like fixed-income products.
We don’t know exactly when rates will drop, but it seems safe to assume that it will happen in the second half of 2024. The rising-rate environment we’ve recently endured has made REITs cheap compared to other asset classes. REM should do well when the rate trend finally reverses.
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Invesco Financial Preferred ETF (PGF)
As a class of securities, preferred stocks are quite cheap right now. That’s because preferreds tend to fall as rates rise and, as investors know all too well, rates have gone up significantly since the end of the COVID-19 pandemic. But what goes up must come down. When rates do start to fall, preferred stocks and other income vehicles will reflect that reality and should see sustained capital appreciation.
PGF is an index ETF based on the ICE Exchange-Listed Fixed Rate Financial Preferred Securities Index. The marked increase in rates our economy has seen over the past several years created good value in preferred stocks in general and financial preferreds in particular. This fact makes PGF potentially very cheap indeed.
The fund’s expense ratio of 0.56% is not unreasonable, and the current 12-month yield of 6.4% is quite attractive.
iShares S&P Small-Cap 600 Value ETF (IJS)
One of the best ways for individual investors to find cheap stocks is to have expert portfolio managers do it for them. That’s the investment rationale behind IJS.
IJS is an index ETF with $6.7 billion in assets under management. The fund closely tracks the S&P Small-Cap 600 Value index. The index and the fund hold small-cap stocks that are considered undervalued compared to the market and the universe of small caps. This ETF can always be considered cheap because when a portfolio holding becomes expensive, it’s dropped from the index and sold from the fund.
Another reason to look at IJS as a cheap ETF is the fact that small caps have greatly underperformed large caps. It’s impossible to say how long this trend will continue, but it won’t be forever. The tables will turn and, when they do, IJS will look like a bargain at today’s share price.
Additionally, IJS is a low-cost fund with an expense ratio of just 0.18%. You shouldn’t buy it for the income, but investors will nevertheless appreciate the 12-month yield of 1.6%.
Vanguard Value Index Fund ETF (VTV)
VTV is cheap by the same measures as IJS, the previous entrant on our list. But VTV invests in large-cap rather than small-cap stocks.
VTV is a $164 billion ETF that mirrors the CRSP U.S. Large Cap Value Index, which is a broad-based equity index made up of stocks that are considered cheap or undervalued by current market standards.
Investors in Vanguard funds have come to expect low fees and expenses. VTV does not disappoint in that regard. The fund’s expense ratio comes in at just 0.04%.
Growth stocks have led the way so far this year, but VTV has managed a respectable year-to-date return of 10.1%. When value stocks return to favor, the total return of VTV should improve from there. Income-wise, VTV has a trailing-12-month yield of 2.5%. That yield will serve to enhance returns on the upside and protect capital on the downside.
Vanguard Mid-Cap Value Index Fund ETF Shares (VOE)
With both a small-cap and a large-cap ETF featured on this list, it only makes sense to include a mid-cap fund next. VOE is an excellent example of a low-cost ETF for investors who see value in the mid-cap stock market segment.
The CRSP U.S. Mid-Cap Value Index comprises mid-cap stocks thought to represent very good value compared to the entire mid-cap universe. VOE is a $28 billion Vanguard index ETF that very closely tracks that index. In other words, VOE buys and holds cheap stocks, making it a cheap ETF.
The index and VOE have experienced very little security turnover recently. Investors should not expect to see high levels of internal buying and selling.
Typical of Vanguard funds, the fund’s expense ratio is low, at just 0.07%. This fund features a nice trailing yield of 2.2% as well.
SPDR Blackstone Senior Loan ETF (SRLN)
SRLN is a fixed-income fund, but it is not a typical or traditional one. SRLN invests in a unique kind of security called bank loans. Bank loan funds buy and hold floating-rate loans that have been issued by regional and national banks and securitized into bonds by Wall Street investment bankers. Like most income funds, SRLN looks cheap right now. It should do quite well in the coming months if and when interest rates begin to moderate.
SRLN has $6.4 billion in AUM and is a part of the well-respected SPDR family of ETFs. The fund has a reasonable expense ratio of 0.7% and an exceptional trailing yield of 8.8%. The yield makes this fund attractive for investors looking for current income as well as for those looking for bargains in the ETF market.
SRLN uses the Markit iBoxx USD Liquid Leverage Loan Index and the Morningstar LSTA U.S. Leveraged Loan 100 Index as benchmarks, but it is not a standard index fund. The objective of the fund is to outperform — not match — those indexes.
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7 Cheap ETFs to Buy Now originally appeared on usnews.com
Update 05/20/24: This story was previously published at an earlier date and has been updated with new information.
