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Index funds are increasingly gaining popularity among investors, and for good reason. The best index funds provide transparency, tax efficiency, and diversification for a conveniently low cost, so investing in these vehicles can be a powerful strategy to optimize returns while keeping risks under control. In that spirit, our contributors share with our readers three particularly attractive index funds to buy in August.
Emerging-markets stocks for opportunistic investors
Andres Cardenal: Vanguard Emerging Markets (VWO 0.27%) is an exchange-traded fund that tracks the FTSE Emerging Markets Index, a free-float-weighted index that includes nearly 900 stocks from 22 emerging-market countries. China accounts for the lion's share of the portfolio, representing 28% of assets. Taiwan accounts for 15%, followed by India (12%), South Africa (8%), Brazil (8%), Mexico (5%), and Russia (4%). The fund has an aggressively low annual expense ratio of 0.15%, 90% lower than the average expense ratio of funds with similar holdings.
It's a cause for concern that many emerging-market economies are going through significant instability. On the other hand, emerging markets as a group will continue on the path to sustained growth over the coming years and decades, so short-term uncertainty can create a buying opportunity for long-term investors.
According to data from Morningstar, the average company in Vanguard FTSE Emerging Markets Index Fund trades at a forward price-to-earnings ratio of 12.7. By comparison, stocks in the S&P Depository Receipts (SPY -0.21%), a popular ETF that replicates the S&P 500 index, trade at a forward P/E of around 18.4.
Stocks in emerging markets are considerably cheaper than in the U.S., a situation that bodes well in terms of potential for returns going forward. Long-term investors with a value-oriented mindset may want to consider adding some emerging-markets exposure to their portfolio, and Vanguard FTSE Emerging Markets is an efficient vehicle for doing so.
A highly specialized fund focused on growth
George Budwell: One of the best ways to generate market-beating returns is to invest in disruptive new technologies before most investors have spotted the trend. Cancer immunotherapy is a prime example. Even though immunotherapies are forecast to become the dominant form of cancer treatment by as early as 2023 and displace many older chemotherapies as the go-to backbone therapy, the market has seemingly lost its taste for speculative immuno-oncology stocks of late because of a handful of clinical setbacks this year.
The Loncar Cancer Immunotherapy ETF (CNCR -1.44%) -- which tracks the performance of several top immuno-oncology companies, for example -- has shed nearly 18% of its value in 2016:
With the industry gearing up for literally dozens of pivotal data readouts over the next 12 months, however, this downtrend is set for a sharp reversal soon. After all, the FDA recently saw fit to rapidly lift its clinical hold on Juno Therapeutics' (JUNO) lead CAR-T therapy, JCAR015 -- despite the death of three patients in the therapy's ongoing trial for adult patients with relapsed or refractory B cell acute lymphoblastic leukemia.
The FDA thus appears to be willing to overlook some of the serious risks associated with novel therapies such as JCAR015 as a result of their ability to produce unprecedented response rates in hard-to-treat malignancies. As additional clinical failures are almost guaranteed, though, investors may want to take a broad approach to this emerging space by buying the Loncar Cancer Immunotherapy ETF -- instead of individual stocks -- to lower their downside risk.
Money in the bank
Jason Hall: It's not very often that I think a sector-specific ETF that's underperformed the market as a worthy investment. However, the SPDR S&P Bank ETF (NYSE: KBW) is one that I think deserves a close look right now:
KBE Total Return Price data by YCharts
So why this ETF? In short, it looks to be relatively undervalued right now, trading for a price-to-book value of around 1, and with a trailing price-to-earnings ratio of just over 13.
This index fund has lost value over the past year or so as the market has turned generally unfavorable on the banking sector. And not without some reason, with U.S. interest rates remaining low, and the potential of the Brexit having a negative impact on the earnings for many of the multinational banks that are part of this index.
However, I think even with the recovery since earlier this year in many bank stock prices, a lot of bank stocks are still relatively cheap.
Here's some evidence:
CIT Price to Book Value data by YCharts
These 10 banks make up more than 25% of the SPDR S&P Bank ETF. The price-to-book value for most of these stocks is down by 20% and more since the start of 2015. But at the same time, this isn't a case of banks that are losing assets. Rather, it is by and large a matter of investors who are avoiding the sector, driving down valuations.
So that makes this ETF worth a close look right now. Eventually the market will come back to banks, and valuations will go back up. And when that happens, patient investors in this ETF should do pretty well.
