ETFs to Avoid If You Don't Want to Fight Janet Yellen

Photograph: Getty Images Close

Photograph: Getty Images


Photograph: Getty Images

'Don’t fight the Fed’ is usually a broad bit of advice, meaning that it's smart to invest in line with the Federal Reserve's monetary policy. For example, invest in stocks when interest rates are low and look to take profits when policy tightens. But on July 15, Federal Reserve Chair Janet Yellen got unusually specific in talking about the market. In Senate testimony, she dissed stock sectors such as social media and biotechnology, calling them “substantially stretched" and overvalued.

One of the drivers of those pricey stocks: the Fed's easy money policy, which has encouraged investments in riskier assets. Putting that aside, here are a few ETFs to avoid if you want to stay in line with the Fed Chair's thinking.

Global X Social Media ETF (SOCL)

SOCL was down 1 percent on Yellen's testimony. The ETF has dropped 10 percent in 2014, but is up 44 percent over the past two years. SOCL tracks 30 social media companies around the world, with roughly half in the U.S., 30 percent in China and the rest in Japan and Europe.

The median price-earnings ratio in SOCL's portfolio is 28, according to Bloomberg data, compared to 19 for the S&P 500. So, yeah, as investors have priced in strong growth for companies like Facebook Inc. (FB), Twitter (TWTR) and LinkedIn Corp. (LNKD), SOCL has become expensive. Short interest in the ETF -- bets that its price will fall -- have risen since Yellen's testimony, according to Markit Ltd.

Other ETFs full of high-flying social media names include the PowerShares NASDAQ Internet Portfolio (PNQI) and the First Trust Dow Jones Internet Index Fund (FDN).

iShares Nasdaq Biotechnology Index ETF (IBB)

IBB also fell on July 15, losing 2.2 percent. That leaves it up 11 percent so far this year and up 91 percent in the past two years. IBB tracks 121 biotech-related stocks. Its portfolio has a median price-earnings ratio of 35, nearly twice that of the S&P 500. Yellen's not exactly going out on a limb in saying the sector's stretched.

IBB is the biggest biotech ETF by far, with assets of $4.8 billion. It charges investors a fee of 0.48 percent. Peer ETFs include The SPDR S&P Biotech ETF (XBI) and the Market Vectors Biotech ETF (BBH).

iShares MSCI USA Momentum Index Fund (MTUM)

Yellen's comments were directed at stocks with some of the strongest momentum, so it's not surprising that MTUM was down -0.47 percent on her testimony. It's up 6 percent year to date, though, and 47 percent in the past two years. (That calculation relies in part on the return of the ETF's index, since the fund itself isn’t two years old yet.)

MTUM is packed with high-flying growth stocks that are outperforming their peers in sectors like pharma, Internet and biotech. The median price-earnings ratio for the stocks in this ETF is 22, which tops the S&P 500's 19. That's much lower than SOCL and IBB thanks to its more diversified exposure in a wide range of industries. But still, this is an ETF to avoid if you want to invest in a Yellen-friendly way. MTUM has $310 million and an annual fee of 0.15 percent.

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Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here, and weekly ETF podcasts can be found here.

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