US Equity ETFs: Best and Worst

01/01/2014 8:00 am EST

Focus: STOCKS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Mark Salzinger, editor of The Investor's ETF Report, reviews the best and worst performing ETFs on his 2013 Best Buy list; among his recommended US equity ETFs, the best performer rose 63%, while even the "worst" performer gained 25%. Here's his update.

Our best and worst US stock ETF recommendations, so far, in 2013, have been identical to our best and worst picks in 2012.

The best has been iShares Nasdaq Biotechnology Index Fund (IBB). IBB has gained 63.4%, so far, in 2013 (through November 30), after gaining 32.1% in 2012.

It has been one of the top performing US stock ETFs over the past several years, gaining strongly in rising markets and holding up relatively well when markets decline.

IBB holds about 120 stocks. More than half the assets are in its top ten positions, including dominant biotech leaders with proven products, robust pipelines, and strong finances.

More than 40% of its portfolio's in small- and mid-cap stocks, and even 8% is devoted to micro-cap stocks (with market capitalizations less than about $500 million).

IBB's strong performance and robust growth prospects have afforded it a premium valuation: its average price/earnings ratio (P/E) on next year's earnings was recently 28.7, versus 19.7 for the Russell 3000 Growth Index.

However, with expected earnings growth of nearly 20%, IBB's P/E-to-growth ratio is about 1.5, roughly the same as the Russell 3000 Growth Index. We continue to recommend IBB in our Wealth Builder model portfolio.

Our 'worst' US stock pick in 2013, is worst, only in a relative sense. After gaining just 5.2%, versus the S&P 500's (SPX) 16.0% in 2012, SPDR Select Energy (XLE) has gained 22.7% in 2013, versus 30.1% for the S&P 500.

We believe that XLE continues to represent a good value: it has a below-market valuation (P/E of 14.7 on next year's earnings, versus 16.0 for the S&P 500) and exposure to world-class energy producers and energy services companies.

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