How do you know if an ETF is overvalued?
ETF valuation can be viewed on two levels.
On one level, is the ETF price trading in line with its net asset value? On the rare occasions
when ETFs rise to a premium over NAV, they can be objectively described as “overvalued”
and conversely, when they trade at a discount to NAV, they can be objectively described as
“undervalued”.
The valuation level of the underlying assets is a more subjective question. For instance, in
August 2023, some “value” investors would argue that US technology shares are
“overvalued”, which by extension would also mean that ETFs investing in these shares are
also “overvalued”. For many years between 2015 and 2021, many government bonds in
Europe, such as those issued by Germany, had negative yields, which also led investors to
describe them as “overvalued”. Of course any financial market can remain overvalued and
become more overvalued for months or years.
