Prof. Shiller was in Toronto recently for the launch of the BMO Shiller Select US Index ETF (ZEUS), a fund that selects US stocks using a methodology based on Shiller’s CAPE ratio. The acronym stands for cyclically adjusted price-to-earnings: unlike traditional P/E ratios, which usually use only the previous 12 months of earnings, CAPE uses the average of the previous 10 years. The idea is to smooth out any short-term aberrations and provide a more useful measure of a company’s value.
The CAPE ratio is widely followed, not just for individual companies, but for the US market as a whole. During the interview I mention that a 2012 study by Vanguard found the CAPE ratio was the one of the most useful tools for estimating long-term stock returns—although even then, it explained less than half of subsequent performance.
Prof. Shiller has also lent his name to the Case-Shiller Home Price Indexes,