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) - Get iShares Morningstar Small-Cap Growth ETF Report and the much smaller First Trust Dow Jones Select Micro-Cap Index Fund (FDM) - Get First Trust Dow Jones Select MicroCap Index Fund Report, 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) - Get Invesco Dynamic Biotechnology & Genome ETF Report 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) - Get Invesco WilderHill Clean Energy ETF Report. Despite all of the positive indications on international equities, the model also picks iShares MSCI Taiwan (EWT) - Get iShares MSCI Taiwan ETF Report 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) - Get iShares Core U.S. Aggregate Bond ETF Report and iShares Lehman TIPS Bond (TIP) - Get iShares TIPS Bond ETF Report.
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.
Rudy Martin is the director of research for TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
While Martin cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.