Buffett Indicator Turns Red: Time for High-Momentum Value ETFs?

Berkshire Hathaway BRK.B CEO Warren Buffett handed over the reins to his hand-picked successor, Greg Abel, last week. The official passing of the torch highlights the end of an era and one of the most successful careers in investing history.

Champion of Value Investing

Throughout his career, Buffett supported the principles of value investing, learnt from his mentor Benjamin Graham. At its core, the philosophy emphasizes discipline and a reluctance to overpay for assets.

What Is the Buffett Indicator?

One of Buffett’s most closely watched valuation tools is the so-called “Buffett Indicator,” which divides the Wilshire 5000 Index — often viewed as a proxy for the total U.S. stock market — by annual U.S. GDP.

“The ratio has certain limitations in telling you what you need to know,” Buffett said once. “Still, it is probably the best single measure of where valuations stand at any given moment,” as quoted in a Yahoo Finance article.

Valuations at Record Extremes

Today, the Buffett Indicator is flashing levels never seen before, thanks to the artificial intelligence boom. The reading suggests that stocks may be overdue for a healthy pullback in early 2026, the same Yahoo Finance article mentioned.

According to data from GuruFocus, the indicator currently stands at about 221.4%, up roughly 22% since April 30, as quoted in the same article. Another Yahoo Finance article revealed that in a 2001 reflection on the dot-com bubble bust, he offered a simple guide: “If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire.”

AI Optimism Drives Markets Higher

The S&P 500 has surged nearly 15% over the past year as investors piled into AI-related names and bet big on strong earnings potential. Analysts have responded by sharply raising profit forecasts, helping justify elevated stock prices.

Buffett himself has grabbed parts of the AI future, maintaining major investments in Apple AAPL, Amazon AMZN, and, more recently, Alphabet GOOGL. However, worries about overvaluation and the payoff timeline in the AI space have been doing the rounds lately, forcing some investors to pay attention to the Buffett Indicator now.

Geopolitical Tensions in Place

We have seen geopolitical conflicts and unrest in various parts of the world in 2025, including the Russia-Ukraine war, Israel-Gaza war and India-Pakistan conflict. The year 2026 has also opened up on the same note. In a major military operation on Jan. 3, 2026, President Donald Trump announced that U.S. forces carried out "large-scale strikes" against Venezuela and captured its president, Nicolás Maduro, and his wife, Cilia Flores.

Time to Buy Undervalued High-Momentum ETFs?

Given this uneven economic and investing backdrop, value stocks tend to perform better. The S&P 500 Index traded at a price-to-earnings ratio of 29.31 on Dec. 30, 2025, according to GuruFocus.

Historically, the S&P 500 P/E ratio reached a record high of 131.391 and a record low of 5.31, with the median value of 17.989, per GuruFocus. This shows that the S&P 500 is currently trading at a higher P/E than its Median value.

Against this backdrop, below we highlight a few exchange-traded funds (ETFs) that have a lower P/E than 30X and are currently in high momentum. Returns are as per Yahoo Finance (as of Jan. 5, 2026).

WisdomTree Emerging Markets High Dividend Fund DEM

P/E (TTM): 10.34X (per Yahoo Finance)

Six-Month Return: Up 4.2%

One-Month Return: Up 2.1%

Yield: 4.82% annually

Expense Ratio: 0.63%

WisdomTree Japan SmallCap Dividend ETF DFJ

P/E (TTM): 13.00X (per Yahoo Finance)

Six-Month Return: Up 15.7%

One-Month Return: Up 2.4%

Yield: 2.66% annually

Expense Ratio: 0.58%

Brandes U.S. Value ETF BUSA

P/E (TTM): 17.58X (per Yahoo Finance)

Six-Month Return: Up 15.7%

One-Month Return: Up 2.4%

Yield: 1.52% annually

Expense Ratio: 0.60%

Davis Select Financial ETF DFNL

P/E (TTM): 15.37X (per Yahoo Finance)

Six-Month Return: Up 14.4%

One-Month Return: Up 5.8%

Yield: 1.36% annually

Expense Ratio: 0.63%

State Street SPDR Global Dow ETF DGT

P/E (TTM): 19.13X (per Yahoo Finance)

Six-Month Return: Up 12.6%

One-Month Return: Up 2.3%

Yield: 2.77% annually

Expense Ratio: 0.50%

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This article originally published on Zacks Investment Research (zacks.com).

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