Overvalued and Undervalued ETFs

I like to buy on the cheap. Problem is, when you're looking at an index fund/ETF, or a sector fund/ETF, there's not always something obvious like a P/E ratio to help you figure out if it's expensive or cheap.

It can be easy: I'd like to add an REIT piece to my portfolio this year, but I doubt anyone thinks REITs are cheap right now.

One of the things I look at for valuations is Morningstar's Fair Value numbers. I think many of these valuation tools are a little "out there", but at least they can give you an idea. Morningstar recently had articles on the valuation of market indexes and some sectors, as compares to their Fair Value, here and here. A login may be required; it just takes an email address and I recommend it.

The market indexes are trading pretty near Morningstar's fair value. The Dow Jones Industrial Average is about 6.9% below it's "fair value" while the S&P 500 is about 3.5% overvalues and the Nasdaq is about 2% overvalued.

As for sectors, Morningstar rates several REITs, including ICF, RWR, IYR, and VNQ, as being overvalued by 23% to 27%. They rate the energy sector as overvalued as well, including IEZ as 47% overvalued!

Morningstar rates several technology ETFs as undervalued, including IGM at 84% of fair value, and IGN at 76% of fair value. Homebuilder ETFs are the most undervalued, including XHB at 73% of fair value and ITB and 67% of fair value .