1 No-Brainer ETF to Buy If You Think Stocks Are Overvalued

Personally, I think the U.S. stock market looks expensive right now. One widely cited measure is the Buffett Indicator, which compares the total market capitalization of stocks to the country’s gross domestic product. Historically, anything above 100% suggested rich valuations. Today, that figure sits around 233%.

That said, these warnings apply mostly to the market as a whole. If you are buying market-cap-weighted benchmarks like the S&P 500, or even more concentrated indexes like the Nasdaq 100, you are essentially buying the most expensive and most popular stocks in the market.

But that is not the only way to invest. You can search for cheaper stocks yourself using screeners, or you can let an exchange-traded fund (ETF) do the work for you. Personally, I prefer the latter.

One ETF that fits this approach is the BMO MSCI USA Value Index ETF (TSX:ZVU). Here is why it may appeal to investors who believe U.S. stocks are currently overvalued.

What is ZVU?

ZVU is a passive ETF that tracks a value-focused U.S. equity index. Instead of owning hundreds of companies across the entire market, the index narrows its selection down to roughly 140 stocks that score well on traditional value metrics.

Specifically, companies are screened based on three characteristics: the price-to-book value, price-to-forward earnings, and enterprise value-to-operating cash flow ratios. These factors aim to identify companies trading at relatively cheaper valuations.

The ETF also places limits on concentration. No single company can exceed 10% of the portfolio, which helps prevent any one stock from dominating returns. The index is rebalanced twice a year to maintain the value focus.

Sector exposure still resembles the broader U.S. market to some extent. Technology remains the largest sector, followed by financials and communication services. However, the types of companies inside the portfolio tend to look different from those dominating growth-heavy indexes.

Instead of flashy artificial intelligence names and high-growth tech firms, you are more likely to find established businesses with steadier earnings and lower valuations. Some investors jokingly call them “boomer stocks,” but they often represent durable, cash-generating companies.

ZVU: Odds and ends

Because ZVU follows a more specialized index than something like the S&P 500, it is slightly more expensive. The ETF currently charges a 0.33% management expense ratio. That is still cheaper than most actively managed funds, but higher than the ultra-low-cost fees associated with simple index ETFs.

Value stocks also tend to pay higher dividends than the broader market. As a result, ZVU offers a distribution yield of about 1.5% on an annualized basis. That yield can fluctuate, but it does provide a modest income stream.

Performance has been respectable, though not spectacular. Over the past five years, the ETF has delivered an annualized return of about 11.3%. That is solid by most standards, but it has trailed the S&P 500 during a period when high-growth technology companies dominated the market.

This is a key point to understand about value investing. When value stocks fall out of favour, strategies like this may underperform broader indexes. But when valuations matter again, the performance gap can reverse quickly. For investors worried about expensive markets, ZVU offers a way to stay invested in U.S. equities while tilting the portfolio toward cheaper companies.

The post 1 No-Brainer ETF to Buy If You Think Stocks Are Overvalued appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.