by Will Ashworth | January 17, 2012 9:11 am
If you’ve been paying attention to the North American International Auto Show in Detroit — which runs through Jan. 22 — you’re probably aware that Ford (NYSE:F) took home the coveted Eyes on Design award for its 2013 Fusion. It’s just another milestone in arguably one of the greatest corporate turnarounds in American business history.
While Ford isn’t out of the woods completely, its stock is oh-so enticing at current levels. Tempting as it might be, though, the average investor who has to work for a living might be better off investing in an exchange-traded fund with Ford in its top 10 holdings. Read on and I’ll discuss some of the options.
According to the ETF Database, there are 11 funds with Ford as a top-10 holding. Easily the biggest is the Consumer Discretionary Select Sector SPDR (NYSE:XLY) with $2.56 billion in total assets. As its name implies, the ETF invests in stocks of companies benefiting from discretionary spending. Ford is the seventh-largest holding with a 3.65% weighting.
There are a total of 80 stocks in the fund, with McDonald’s (NYSE:MCD) at the top at 8.13%. In terms of performance, the XLY has delivered annualized three-year returns of 26.5% as of Jan. 12. That compares to 66.3% for Ford and 16.7% for the S&P 500. Any time you can beat the index by more than a couple of percentage points on an annual basis, you’re winning. While Ford’s resurgence has led to it outperforming the ETF by a wide margin, during the past 10 years, on an annualized basis, it has underperformed by 588 basis points. Equally important, the ETF has outperformed the index by 161 basis points annually. These are very consistent returns.
As mentioned in a previous article, a 32-stock portfolio eliminates about 96% of the company risk involved in holding just Ford alone. Therefore, an 80-stock portfolio like the XLY, while performing admirably, might be overkill. Instead, we should try to find another fund with similar returns but a smaller number of stocks.
The two most obvious funds are the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ) with 37 stocks and the Global X Auto ETF (NASDAQ:VROM) with 50. Unfortunately, neither has more than a year’s performance history, and even if they did, I’d be hard-pressed to recommend a fund with such a narrow focus. Of the remaining eight funds, only two have less than 80 stocks: the Guggenheim Ocean Tomo Growth Index (NYSE:OTR) and the PowerShares Dynamic Consumer Discretionary Fund (NYSE:PEZ). Both have 60 holdings, with the Guggenheim fund possessing a higher weighting of Ford at 4.94%, compared to 2.53% for the PowerShares ETF. On a performance basis, both have three-year annualized performance numbers slightly above 21%. Neither has a five-year or 10-year history.
While the PowerShares ETF is a traditional consumer discretionary fund, with names like Limited Brands (NYSE:LTD) and VF Corp. (NYSE:VFC) topping its list of holdings, the Guggenheim fund is far more interesting. It’s based on the top growth companies of the broad-market Ocean Tomo 300 Patent Index and represents the top 60 companies with the highest ratio of patent value relative to book value. At the top of its holdings are companies like Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM). Clearly, it’s a fund driven by technology and R&D. While interesting, I’d only consider it if, in addition to wanting to own Ford, you also wanted exposure to technology.
If you want a piece of America, you can own Ford alone — or you can do so diversely through XLY, as each of its top 25 holdings is a household name for consumers. XLY’s performance since the recession ended in June 2009 is exemplary, and in the long term, it has outperformed the S&P 500 in nine of the past 11 years. As an investor, it can’t get much better than that.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned stocks.
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