Exchange-traded funds (ETFs) are set for a second straight record-breaking year of inflows, having received $469 billion of investment over the past six months, according to fund research firm Morningstar.
A strong June saw ETFs add $74 billion in inflows, with last year’s headline-grabbing success story ARK Invest pulling in $1.1 billion to return to the top 10 providers list.
“Exchange-traded funds look primed for another banner year, as investors continued to pour in new money last month,” Morningstar analysts Ryan Jackson and Ben Johnsons said in a July 1 research note. “The $500 billion that investors dumped into ETFs last year set an annual record, but that’s likely to be short-lived. ETF inflows are on pace to blow past that figure, perhaps as soon as next month.”
An ETF tracks a particular index, sector, or commodity. Like regular stocks, ETFs are bought and sold on stock exchanges.
Demand for these types of funds have surged since the start of the coronavirus pandemic in March 2020, with investors betting on macroeconomic recovery and both value and growth stocks competing to offer the best returns.
Morningstar analysts compiled a list of 10 undervalued ETFs by dividing the fund’s current price by what they calculated to be its fair value. The price/fair value ratio can be used to calculate which cheap ETFs have them most upside for investors.
Four ETFs had a price/fair value ratio of less than or equal to 0.8, implying that they could be undervalued by more than 20%.
Those 4 funds – the Global X MSCI China Financials ETF, the iShares US Oil Equipment & Services ETF, the VanEck Vectors Oil Services ETF, and the Invesco Dynamic Oil & Gas Services ETF – symbolize the two key themes of Morningstar’s research note. Jackson and Johnson argue that energy funds and foreign stock ETFs are most likely to deliver returns for investors.
Energy funds have enjoyed strong returns so far in 2021, with the aforementioned iShares US oil ETF posting a year-to-date return of 62%. However, Morningstar analysts say that investors are still undervaluing the sector. WTI crude oil prices have risen by 55% in 2021, with the S&P 500 recording gains of 16%.
“This fund – and its energy peers – remain considerably undervalued despite a torrential first half of the year,” Jackson and Johnson said. They listed the SPDR S&P Oil & Gas Equipment & Services ETF as another cheap, undervalued energy fund.
Morningstar also highlighted several foreign ETFs, with a particular focus on China. Global X’s China Energy and China Real Estate ETFs joined the Financials ETF on the list of undervalued funds. The China Energy ETF posted the strongest figures in June, delivering a 4.31% return for investors.
“Investors hunting comparably cheap valuations in a more-diversified portfolio likely need to look overseas,” Jackson and Johnson said. “Foreign stock ETFs dominated the ranks of the cheapest broad-based ETFs at June’s end. Most of these funds zero in on international stocks that look cheap relative to their dividends or other fundamental measures of value.”
Alongside the three Global X China ETFs, they listed the Van Eck Vectors Egypt ETF, which is up 0.28% this year, the Invesco RAFI Strategic Emerging Markets ETF, which has gained 13%, and the Davis Select Worldwide ETF, which is up 10.7%, as undervalued funds set to surge in the second half of 2021.