ETF stocks, or just ETFs for short, are excellent ways to gain broad exposure to the market. They are a core part of any portfolio, so let’s take a look at the cheapest ETF stocks.

By “cheapest”, I’m going to use a few different metrics. On the one hand, I will choose ETFs that have P/E ratios that are reasonable in context with the stocks that they own. Thus, an ETF with a lot of growth holdings will have a higher aggregate P/E than the market or sector benchmark.

I will also look at the relative price of the ETF in relation to its risk, which I haven’t talked a lot about in my articles yet.

ETFs number in the thousands at this point, so I’m choosing three of the cheapest ETF stocks out there, but also ones that I think are important long term holdings.

 

The Cheapest ETF Stocks For 2019

If you’re in a hurry, below are our picks for the lowest priced ETF stocks as of this writing.

1. Utilities Select SPDR: Steady and reliable wins the race.
2. iShares Min Vol Emerging Markets: Low volatility emerging market exposure.
3. iShares US Aerospace and Defense: One of the best performing ETFs in a critical industry.

Keep reading tolearnmore about these inexpensive ETF stocks and my thoughts on them.

What Are ETF Stocks

ETFs are groups of individual stocks. An ETF will gather up the cash of many investors, and than invest that cash in a basket of selected stocks. That basket’s elements may change or be re-balanced on a monthly, quarterly, semi-annual, or annual basis. The basket may have 20 stocks or it could have several thousand if it is meant to mirror an index.

The ETF gives investors exposure to many stocks, in order to provide diversification, so that all of investors’ money is not placed in just one stock that could suddenly tank without warning.

ETFs then give up the huge reward that might be possible with one stock that hits it big, but at the same time preserves capital by spreading the risk across many stock selections.

Read Also: What are the best tech stocks to buy right now?

How Do You Determine What Qualifies As The Cheapest ETF Stocks?

The cheapest ETF stocks may fit many definitions, but I like to find ETFs that have at least one of these characteristics:

1. A standard deviation that is no more than 150% of the ETF’s annual average return that is
2. An aggregate P/E ratio that reflects a cautionary management approach to valuation.
3. Exposure to an important, must-own sector.

Standard deviation that is no more than 150% of annual average return

We need to talk about risk. Standard deviation tells us how much confidence we will have that a certain data point will fall within a certain range. The only real way to measure risk is to look at standard deviation of an ETF in relation to overall return.

We want to have a very high degree of confidence about what our investments might earn. So we always are going to be looking at a stock’s mean return over a certain period of time, and it’s standard deviation.

If an investment is very volatile – that is, its price moves a lot – then its standard deviation will be a very high number. If an investment is not very volatile – that is, its price moves a little – then its standard deviation will have a very low number.

The reported standard deviation in an ETF provides us with a 95% certainty that a return will fall between two extremes.

If an ETF has an average annual return of 10% with a standard deviation of 8, then our 95% certainty range is two standard deviations (8+8) in either direction. That means that ETF will have a 95% chance of returning between -6% and +26% in any given year.

Aggregate P/E ratio reflecting cautionary approach to valuation

This metric is admittedly subjective, but it has served me well. That’s because Aggregate ETF P/E ratios aren’t always reliable. If we are looking at an ETF with lots of growth stocks, we would expect a higher P/E ratio for the fund than what the overall market might suggest it should have.

The same is true for value stocks.

I look at the ETF and ask, “is the P/E ratio of this fund, considering its holdings, out of whack for where the stocks and the sector are at the present time”? If so, I don’t buy. If not, I consider it as a purchase.

Exposure to a must-own sector

Many investing gurus think you should just own ETFs that represent the big indices. I totally disagree.

You want to own ETFs that offer exposure to investments that have solid risk-adjusted returns and that provide exposure to sectors that help to tamp down volatility from individual stocks held in your portfolio.

Thus, a “must own sector” ETF may not necessarily mean an energy ETF, but a low-volatility version of an index, or an ETF with alternative investments.

Here’s a video that helps you with investing in the cheapest ETF stocks.

Utilities Select SPDR Fund

What is it?

This ETF “seeks to provide investment results that correspond to the price and yield performance of the Utilities Select Sector of the S&P 500 Index (the Index). The Index includes companies that produce, generate, transmit or distribute electricity or natural gas.”

What makes it a cheap stock?

The beautiful thing about utilities is that they are regulated. Normally, us capitalists don’t care for regulations. However, because utilities are monopolies, regulation is required. As investors, we love it, because it leads to consistency and predictability.

That also means – say it with me – “lower volatility”.

Because utilities are regulated as far as what they can charge consumers, there is high degree of probability that analysts can predict a utility’s revenue. With prices known, what matters is how much or little a certain utility will be consumed.

With heating oil, for example, utilities in the colder northeast parts of the country would be expected to have higher use in winter. It will depend on just how cold or warm it will be, but by now, everyone has those statistics down to a science.

Then it’s a question of how much capital must be expended for upkeep, maintenance, and so on. Whatever is left over can be thrown off as a dividend, or reinvested, or used to repurchase stock. Dividends are the most attractive thing for retired investors.

The ETF has an average annual returnof 10.3% with a standard deviation of 12.85, meaning it has a 95% chance in any given year of returning between -15.4% and 36%.

iShares Edge MSCI Minimum Volatility Emerging Markets ETF

What is it?

This ETF provides exposure to emerging market stocks, with a focus on South Asia, mid-cap stocks, and those with lower volatility.

What makes it a cheap stock?

This particular emerging markets investment takes a low volatility approach to an index, selecting some 330 stocks that have had the lowest realized volatility over the past 12 months.

Nearly half the fund is devoted to financials and information technology, with the remaining half nicely diversified across all the other major sectors.

While I would like a little bit more geographical diversification, I am comfortable with the 25% weighting in China, 60% weighting in Taiwan, 10% weighting in South Korea, and the rest scattered throughout emerging markets throughout the world.

Because we are dealing with emerging markets, we are going to see very high standard deviations. That’s okay. That doesn’t mean each and every investment is going to have a low standard deviation itself.

Some may have a history of offering above average returns with a standard deviation that is still significantly lower than the overall market.

This ETF has a 5-year average annual return of 2% with a standard deviation of 11. That means in any given year, it has a 95% probability of returning between -20% and 24%.

The base index has a 5-year average annual return of 4% with a standard deviation of 15.

That means in any given year, it has a 95% probability of returning between -26% and 34%.

iShares US Aerospace and Defense ETF

What is it?

This ETF invests in stocks in aerospace and defense, which includes many recognizable names that handle both military and commercial aircraft as well as space transportation.

What makes it a cheap stock?

Defense and aerospace are an essential part of America. National security, even during dovish administrations, remains a necessity. In fact, since the beginning of the Obama years, this ETF has returned more than 200%.

With all the top names in ITA, like Boeing, Northrop, Lockheed, Raytheon, General Dynamics, Rockwell Collins, and many more, there is simply no better choice as far as having exposure to this sector.

Aerospace is arguably even bigger, with the constant need for innovation, support, logistics, parts, manufacturing – if it flies, it’s aerospace.

This ETF has a ten year average annual return of 19% with a standard deviation of 17, meaning it has a 95% chance of returning between -15% and +53% in any given year. That makes it one of the cheapest ETF stocks in the market right now.