ETF Investing using Shiller’s CAPEs

Much has been written about the merits of passive index investing using Exchange Traded Funds (ETFs). Even for active value investors, I believe there is sometimes a place for ETF investing for people wishing to move into a new market, possibly just outside their circle of competence, in a low-risk fashion.

The way I think about ETFs is using country-specific or sector-specific CAPE (cyclically adjusted price earnings ratio), one of only a few reliable indicators in the whole of finance, usually used as a predictor of medium to long-term (3-10 years) returns. Here’s a short article on how to use CAPE:
Here’s a longer article on CAPE if you want to delve deeper:
You can see the current country-specific CAPEs here:

One of the simplest and safest investment strategy today is a long position in a diversified basket of low-CAPE emerging market ETFs — Russia, South Korea, Singapore all look attractive at the moment — from which one can expect high single digit to low-teen annual returns for the next 5-10 years, a satisfactory outcome in our ultra-low interest “new normal” world. The main issue with this strategy is that its successful execution will likely require an unusual measure of patience.

 

 

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