The Buffett Indicator (total stock market capitalization divided by GDP) is sitting around 217%, a level often cited as a sign that stocks are richly valued. While it’s most often applied to the U.S. market, it’s not just the S&P 500 hitting new records. The S&P/TSX 60 is also sitting at all-time highs.
If you’re already invested, that’s great news. But if you’re just dipping your toes into the market now, it can feel like stepping into boiling water. Timing the market isn’t a winning strategy, but if you’re open-minded, there are exchange-traded funds (ETFs) that still look undervalued even in this environment.
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Value ETFs
One option is the iShares Canadian Value Index ETF (TSX: XCV), which tracks the Dow Jones Canada Select Value Index.
The ETF holds 36 Canadian blue-chip companies screened for value characteristics, sporting an average 1.8 times price-to-book ratio and a 17.8 price-to-earnings ratio. For comparison, the S&P/TSX 60 sits at 2.4 times P/B and 23.6 times P/E.
XCV is heavily weighted toward financials and energy, stripping out much of the market’s current high-flyers in technology and industrials. You also get a respectable 3.4% dividend yield, though the management expense ratio is higher at 0.55%.
Low Volatility ETFs
Another way to tilt toward value with a quality bias is through the BMO Low Volatility Canadian Equity ETF (TSX: ZLB).
This ETF holds a low beta-weighted portfolio of Canadian large-cap stocks. Beta measures a security’s sensitivity to market movements, so lower-beta stocks tend to be less volatile. ZLB’s rules-based methodology selects stocks that have historically shown smaller price swings, rebalancing in May and reconstituting in November.
The ETF holds 52 stocks, with more exposure to utilities and consumer staples compared to XCV. It offers a 2.1% dividend yield with a lower 0.39% management expense ratio.
The Foolish Takeaway
Owning ETFs doesn’t have to mean sticking with the biggest index benchmarks. There are plenty of alternative strategies that target specific types of stocks. XCV can help you lean into value, while ZLB offers a lower-risk profile in a heated market. Both can be useful tools for navigating all-time highs without feeling like you’re overpaying.
That said, neither ETF is as broadly diversified as a total market index fund. They’re best used as satellite positions rather than complete replacements for your core holdings. Allocating, say, 10% of your portfolio to each could give you a meaningful tilt toward value and lower volatility, helping to temper portfolio swings while potentially improving long-term risk-adjusted returns.
