ETFs That Are Poised to Rise -- and Fall

Portfolio managers who beat the Street year after year appear to possess a divine power to predict the future -- particularly where stocks are heading. They are deemed prophets or oracles.

While TheStreet.com Ratings has neither divine powers nor a crystal ball, we do have a trove of parameters that enable us to make a highly educated estimate of what a stock's destiny may be.

Stocks with a low price-to-earnings (P/E) ratio can be considered undervalued. The same generally holds true for low price-to-book ratio (P/B), price-to-sales (P/S) and price-to-cash-flow (P/CF) ratios. The lower the ratio, the lower the risk that the shares may decline in price.

A low P/E ratio signifies a value stock -- it costs less to buy each dollar of earnings. The hope is that after buying a value stock on the cheap, the company's outlook will brighten and investors will value the stock closer to the market average.

The highflying Nasdaq Composite Index is valued at nearly 36 times earnings. The blue-chip S&P 500 Index, which is frequently used as a benchmark for the market, has a P/E ratio of more than 17.

So, for example, an out-of-favor stock with a P/E of 10, whose outlook improves to match the market, could see its stock rise 70% on the same level of earnings.

Below are some exchange-traded funds with buy ratings from TheStreet.com Ratings, due to their superior total return performance and lower volatility.

Of the buy-rated ETFs, these have the lowest average P/E ratio or the lowest average P/B ratio. So these funds appear undervalued, yet their prices have trended higher.

Overperforming, Undervalued ETFs
Buy-rated ETFs with low average price-to-earnings ratio
Fund (Ticker)	Rating	Avg P/E	Avg P/B	Avg P/S	Avg P/CF
PowerShares Dynamic Insurance Portfolio (PIC)	B	9.526	1.569	1.357	6.546
iShares S&P Global Energy Sector Index Fund (IXC)	B+	10.236	2.566	1.07	7.064
Energy Select Sector SPDR Fund (XLE)	B+	10.441	2.561	1.111	7.274
KBW Insurance ETF (KIE)	B	10.772	1.562	1.29	7.231
iShares Dow Jones U.S. Energy Sector Index Fund (IYE)	A-	10.952	2.602	1.22	7.654
Buy-rated ETFs with low average price-to-book ratio
Fund (Ticker)	Rating	Avg P/E	Avg P/B	Avg P/S	Avg P/CF
First Trust Dow Jones Select Microcap Index Fund (FDM)	B	19.393	0.281	1.054	11.191
Powershares Zacks Micro Cap Portfolio (PZI)	B+	29.769	0.374	0.668	8.204
iShares Morningstar Small Value Index Fund (JKL)	A-	23.195	0.558	0.742	11.732
Vanguard Materials ETF (VAW)	B	14.593	0.819	1.018	10.026
iShares Morningstar Small Core Index Fund (JKJ)	B+	24.184	0.927	1.176	12.639
Source: Bloomberg

The low P/E list is dominated by the very profitable energy industry. On the low P/B list, four of the five funds are either small-cap or micro-cap funds whose stocks tend be capitalized with a higher-than-average amount of equity, rather than being overloaded with debt.

On the flip side, stocks with high price ratios are already priced for perfection. High valuations usually accompany high growth rates. One bad quarter of earnings or one missed earnings estimate could disappoint the market. If investors believe that a company's growth rate cannot be sustained, they tend to punish the stock.

In the sell-rated funds below, the stock holdings have already begun to lag the performance of the market. On top of that, the high price ratios suggest that the holdings have room to fall. All of the ETFs on the high-P/E and high-P/B lists hold riskier technology stocks.

Underperforming, Overvalued ETFs
Sell-rated ETFs with high average price-to-earnings ratio
Fund (Ticker)	Rating	Avg P/E	Avg P/B	Avg P/S	Avg P/CF
B2B Internet HOLDRs Trust (BHH)	E-	86.771	2.1	3.253	20.334
Biotech HOLDRs Trust (BBH)	D+	59.21	5.3	6.652	24.358
iShares Goldman Sachs Networking Index Fund (IGN)	E-	59.062	3.125	2.424	20.147
Internet Infrastructure HOLDRs Trust (IIH)	D	42.892	2.946	5.699	22.913
iShares Goldman Sachs Software Index Fund (IGV)	D+	39.174	3.653	4.372	17.37
Sell-rated ETFs with high average price-to-book ratio
Fund (Ticker)	Rating	Avg P/E	Avg P/B	Avg P/S	Avg P/CF
Biotech HOLDRs Trust (BBH)	D+	59.21	5.3	6.652	24.358
iShares Nasdaq Biotechnology Index Fund (IBB)	E	N.A.	4.704	4.525	N.A.
Software HOLDRs Trust (SWH)	D-	31.154	4.587	5.16	17.086
Morgan Stanley Technology ETF (MTK)	D	30.116	4.029	2.563	16.219
iShares Dow Jones U.S. Technology Sector Index Fund (IYW)	D+	25.308	3.961	2.426	15.657
Source: Bloomberg

HealthShares Neuroscience (HHN Quote) and HealthShares Patient Care (HHB Quote), with P/E ratios of 328.182 and 227.363 respectively, didn't make the list, because they are too new to have a rating. But average valuations that high are worth noting.

For more information on these funds, check out our exchange-traded fund report screener. Each report gives a description of the fund, breaks down the overall investment rating into risk and performance grades, and compares the fund with its peers.