By cutting out expensive and lackluster companies, investors can pay less without sacrificing profits. One way to do that is to buy only the cheapest companies and the most profitable ones. For example, a 50/50 blend of the iShares MSCI USA Value Factor ETF and the iShares MSCI USA Quality Factor ETF results in a P/E ratio that is a third lower than the S&P 500 with nearly identical return on equity. It’s addition by subtraction — the 50/50 value/quality blend holds half the number of stocks as the S&P 500. (Disclosure: My asset-management firm invests in iShares ETFs.)
Shop Around
A similar portfolio with foreign stocks also improves the price-profits trade-off relative to the S&P 500, although it doesn’t achieve the same level of profitability because few foreign companies are as profitable as the large U.S. technology companies. Still, a 50/50 blend of the iShares MSCI International Value Factor ETF and iShares MSCI International Quality Factor ETF results in a P/E ratio that is half that of the S&P 500 with return on equity that’s only a third lower.
Investors may have to take more risk to grow their savings, but that doesn’t mean they have to pile into the same high-priced investments. Now more than usual, it pays to shop around.
This article was provided by Bloomberg News.