A look at indices and ETF investing
We look at the valuations of various indices and using ETFs to invest in geographies instead of sectors.
Indices – the good, bad and the ugly
As markets recover from the initial shock of the coronavirus, investors are beginning to examine the outlook for various indices.
In the valuation stakes, it is still the classic battle between value and growth. In the ‘growth’ corner, the most expensive indices are the DAX, at 25 times earnings, and the S&P 500, which despite sitting at a record high is ‘only’ trading at 22 times earnings. Investors will wonder whether, given the recent run of poor German data, the DAX deserves this high rating. By contrast, the S&P 500’s valuation is more justifiable given the stronger outlook for the US economy. If the coronavirus spreads then both economies will be hit, but the export-focused German one would likely suffer more.
By contrast, the cheapest index on a price-to-earnings (PE) basis is, perhaps unsurprisingly, the Hang Seng. This index has weathered civil disorder and now faces further difficulties relating to the coronavirus. As a result, it trades at just ten times earnings, the cheapest by far among the major developed indices. The next closest is the FTSE 100, again another unsurprising candidate, but even this is trading at 18 times earnings.
For those looking for income, especially in this world of low bond yields, it is the ASX 200 in Australia that comes out on top. A yield of over 5.4% is impressive, although the FTSE 100’s 4.7% is not to be sniffed at either.
How to use ETFs to trade country indices
Exchange traded funds (ETFs) are an effective way of allocating capital to specific regions, and for the various indices IG offers a host of tracker funds that can replicate the above indices for a low cost. While these various indices differ wildly in their composition, they provide an interesting way of diversifying investment holdings across geographies rather than just sectors.
By using the IG ETF screener it is possible to filter down the available ETFs to find country-specific trackers, and thus pick an investment based on geography.
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