Saturday, July 02, 2005

Relative Valuations of Various Indexes

Following table lists the P/E ratios and earnings growth rates of all vanguard index funds as of 5/31/2005. I find it very useful from time to time to take look at the relative valuations of various indexes to find out overvalued and undervalued spectrums of the entire market. If you believe in the idea of "what goes around, comes around" or "Market rarely accomodates the majority view" then you could find areas to invest and areas to avoid by just looking at the table below. Abandoning entire sector or spectrum of the market is never a good idea but the new money should be directed in the direction the following table is pointing. Please bring your own compass and determine the direction. My views are listed below the table.

Vanguard Index Fund NameP/E RatioEarnings Growth Rate
500 Index Fund Inv18.110.7
Growth Index Fund Inv24.314.3
Total Stock Mkt Idx Inv1911
Value Index Fund Inv158.2
Mid-Cap Index Fund Inv20.613
Small-Cap Growth Index2717.7
Small-Cap Index Fund Inv21.810.1
Small-Cap Value Index18.34.9
REIT Index Fund Inv38.7-4.7
Emerging Mkts Stock Index10.721.2
European Stock Index Inv16.44.5
Pacific Stock Index Inv13.513.5

  • The most important thing I notice in the table is the line of REIT index fund. The P/E ratio of 38.7 and negative earnings growth makes me worried about the real estate market.
  • The small cap stocks are perceived as riskier investment in the investment community, still, they field higher P/E ratio and lower earnings growth then S&P 500 index fund.
  • Emerging markets stock index fund has the lowest P/E ratio and highest earnings growth among all indexes.

All disclaimers apply.


cvrk said...

Is it correct to calcualte the PE ratios of a mutual funds, when their income is only appreciation?

Jonathan said...

I don't really understand the previous commenter, but I do find it interested that the emerging markets index has such a low P/E ratio. Thanks for pointing that out!

Micro said...

Isn't this really a calculation of the P/E of the holdings of the mutual fund?

If so, it makes perfect sense to me!

themicrokid at