ETF Overview: Risk Premiums for Some Countries.

"RUSSIAN RTS INDEX $ (priced in USD)" trades at eight times earning, meanwhile S&P500 has 14.891 (approximately 13-14 P/E for next year). Assume that US Equity market is correctly priced. So, based on the comparative P/E ratio we conclude that investors agree to pay only 54 cents for one dollar of profit. Is it normal? Actually I don't know. Let's estimate risk premium for some countries.

Equity Risk Premium (US).

First metric is difference between the geometric average of historical rates of returnable on equity market and 10-years Treasury Bonds - 9.26% and 4.97% respectively (for the period 1928-2009). Premium is equal 4.29% (see Historical Returns on Stocks, Bonds and Bills - United States, for instance).

Second one - difference between current or expected Earn-Price ratio and current 10-years Treasury Bonds Yield (we used current Earn-Price ratio). It's aproximately 4.09%. If we assume that expected P/E is equal 14, given this, we get 4.52%.

At the third, Implied Equity Risk Premium. Parameters used in model and results see in following table.

Comparing Country ETFs By P/E - Government Bond Yield - GDP

Some countries have low P/E ratio, while other, by contrast, high. But this does not mean, that some countries are more attractive for investors, then other. So this simple compare may be useless. Actually, countries have different P/E ratios, but also they have different interest rates.

Let's follow the "FED" model. This comparison is more adequate. So, P/E ~ 1/r, where r is 10 year Government Bond yield. Or (P/E)*r=k, where k is adjustment coefficient. In general, Lower k may indicate cheaper equity market (under-priced or troubled). At least, lower k (k<1) means that stock price is less then it's theoretical value.