TheStreet.com Ratings: Finding ETF Shorts

On Tuesday we took a look at the ETFs that might deserve a spot in your portfolio.

Now we head over to the other side: which ETFs look like shorts.

To qualify for our short portfolio, an ETF had to have an overall score in the bottom 30th percentile in our ratings model. The style choices here include both poorly rated sectors and those groups that have done well but started to lose luster during the third quarter.

In the latter case, we pick the lowest-rated exchange-traded fund as a possible short idea.

Be mindful that short-selling is an aggressive strategy that is not appropriate for most investors.

Semiconductors, small-cap and health care ETFs look like clear candidates for continued underperformance, according to our model.

• Teetering techs: The weakness in semiconductor-pricing and general technology-sector malaise are clearly illustrated in the extremely volatile year-to-date performance of the lowest-rated ETF, the iShares Goldman Sachs Semiconductor (IGW). While the ETF finally finished up 2% at the end of the quarter, our model discounts this performance, given the recent and long-term volatility implied by a lack of sustainable, positive performance. The bellwether tech ETF Nasdaq 100 Trust (QQQQ) also merits low ratings for the same low-return, high-volatility performance.
• Swamped small stocks: Representing small-caps are the iShares Morningstar Small Growth(JKK) and the much smaller First Trust Dow Jones Select Micro-Cap Index Fund (FDM), which has $28 million in net assets and is focused on micro-caps. While expense ratios are low for these two ETFs, our model dislikes the single-digit-returns and relatively short track records.
• Biotech/health blowups: Risky businesses generally are risky investments. Pooling bad risks into a $250 million portfolio does not improve results, as demonstrated by PowerShares Dynamic Biotech and Genome Portfolio (PBE) which invests in high-P/E biotechs. Definitely an ETF for gamblers. Our model bets against it being a winner.
• Engorged energy: Also on this list is the worst ETF in a hot sector. If you believe the energy-stock move is overdone, you may want to consider selling the less-liquid, smaller ETFs such as PowerShares Wilder Clean Energy (PBW). Despite all of the positive indications on international equities, the model also picks iShares MSCI Taiwan (EWT) as one that is not likely to do well, given that its price performance tends to track that of volatile technology stocks.
• Bonds overexposed: Our model is still negative on iShares Lehman Aggregate (AGG) and iShares Lehman TIPS Bond (TIP).

Our model prefers stable growth and returns with low expenses. The weak ratings for ETFs do not absolutely preclude the ETFs in the short portfolio from being the winners at the end of 2007. Maybe real interest rates could fall precipitously. Maybe the U.S. dollar could strengthen against the yen and yuan. And maybe U.S. GDP and worker productivity will accelerate next year. But don't bet on it.

In the table below are the ETFs that fit the short-portfolio profile.

Don't Bet On These Semis, small-cap and health care lead the pack of ETFs to avoid
Style	Worst ETF	Ticker	11/1/06 Price	Units	Amt	Rating
Corporate - Invest Grade	iShares Lehman Aggregate	AGG	$100.18	9	$901.62	D+
Non-Us Equity	iShares MSCI Taiwan	EWT	13.05	74	965.70	E
Growth - Domestic	First Trust D Jones Sel Micro Cap	FDM	22.47	44	988.68	E-
Sector - Specialty	iShares Goldman Sachs Semicon	IGW	59.81	16	956.96	E-
Sector - Consumer Services	iShares DJones US Con Services	IYC	65.05	15	975.75	D+
Growth - Domestic	iShares Morningstar Small Growth	JKK	71.59	13	930.67	E
Sector - Health/Biotech	PowerShares Dynamic Biotech	PBE	18.18	54	981.72	E
Sector - Energy/Natural Res	PowerShares Wilder Clean Enrgy	PBW	17.47	57	995.79	E-
Sector - Specialty	Nasdaq 100 Trust Shares	QQQQ	42.00	23	966.00	D-
Government Bond	iShares Lehman TIPS Bond	TIP	100.40	10	1,004.00	D+
Cash			1.00	333.11	333.11
				Total	$10,000.00
Source: TheStreet.com Ratings

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