by Will Ashworth | February 13, 2012 11:37 am
Last week (Feb. 6-10) saw the first weekly decline in the S&P 500 since the beginning of 2012, a fall of 0.2%. Still, the index is up 6.8% year-to-date, its best start since 1991. Bullish investors continue to push the markets higher.
For this week’s roundup of useful alternatives to newsworthy stocks, I’ll look at five InvestorPlace stories published in the past week, recommending an ETF option for the companies discussed. I think you’ll find you can have your cake and eat it, too.
Sin stocks were on the mind of Charles Sizemore on Feb. 6. Sizemore believes Diageo (NYSE:DEO) provides investors with great dividends and excellent long-term returns. Diageo’s products are likely in every household that stocks a bar. He’s right in thinking you can’t go wrong with a stock like that. However, erring on the side of caution, why not opt for the PowerShares International Dividend Achievers Portfolio (NYSE:PID)? Diageo represents 1.5% of its 65-stock portfolio, all of which have increased their dividends for five consecutive years. With an SEC 30-day yield of 3.56%, the fund has achieved a three-year annualized return of 15.12% — 100 basis points higher than the S&P 500. If you’re leery of investing outside the U.S., a dividend fund like this one is just the ticket.
Looking for an undervalued and underappreciated bank? Dan Burrows thinks Wells Fargo (NYSE:WFC) is just such a bank. On Feb. 7, Burrows suggested that Wells Fargo is the Rodney Dangerfield of big banks: It gets no respect. Well, Warren Buffett is WFC’s biggest shareholder, with 7% of the stock, so I’m not sure you can argue that it gets no respect, but it sure appears cheap. If you like the idea of Wells Fargo but aren’t sure about owning the stock, you could always buy Berkshire Hathaway (NYSE:BRK.B). If not, a good alternative that gives you both Warren Buffett’s company and Wells Fargo is the Financial Select SPDR Fund (NYSE:XLF). At an expense ratio of 0.18%, you’re covering most of the bases.
General Motors (NYSE:GM) was on the mind of Jim Woods on Feb. 8 as he reminisced about the carmaker’s record profits in 2011. In anticipation of the announcement of these earnings, investors have pushed GM up 26% year-to-date. Woods suggests that the long-term opportunity in GM stock — despite the runup in 2012 — outweighs any potential downside.
However, if you’re not sure which direction the stock is headed but generally like the car industry’s future, the obvious choices would be either the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ) or the Global X Auto ETF (NYSE:VROM). Both are focused on the automotive industry, with the latter diversifying beyond car manufacturers.
However, I’m thinking about a not-so-obvious fund — the First Trust US IPO Index Fund (NYSE:FPX), which invests in some of the biggest IPOs in the U.S. While it isn’t cheap at an expense ratio of 0.60% annually, the fund gives you 100 stocks that have recently gone public. In the last three years, you’d have done better than the S&P 500. More importantly, GM is the fund’s third-largest holding, at 7.4% of the portfolio. Only Visa (NYSE:V) and Philip Morris International (NYSE:PMI) have a higher weighting in the fund.
On Feb. 9, Jonathan Berr made a case for buying Time Warner (NYSE:TWX), suggesting that its P-E ratio is near its lowest point in the past five years. Investors worried about its AOL (NYSE:AOL) past can hedge their bets by purchasing an ETF. In this example, I’m going to recommend a fund that not only gives you ownership of Time Warner but could also take care of your global equity requirements.
Experts generally recommend simple solutions to individual portfolio construction. For investors who subscribe to this theory, the SPDR Global Dow ETF (NYSE:DGT) gives you a mid- to large-cap equity portfolio, with 44% invested in U.S. stocks and 56% in international ones. Considering that international stocks represent 60% of the world’s total stock market capitalization, this fund almost directly correlates to world markets. Add in a bond ETF and you’ve got all you need.
On Feb. 10, Tom Taulli, InvestorPlace’s IPO Playbook blogger, discussed the ongoing relationship between Zynga (NASDAQ:ZNGA) and Hasbro (NYSE:HAS). It seems Zynga could start using Hasbro’s brands — Scrabble, Pictionary, Trivial Pursuit, Risk, etc. — in its own games, such as FarmVille and FrontierVille. That could be a win/win scenario.
I’d love to suggest an ETF that owns both stocks, but unfortunately, there aren’t any. Zynga, which went public in December 2011, is the 10th-largest holding — 4.59% — in the Global X Social Media Index ETF (NYSE:SOCL), which is only days older than Zynga itself. The fund has an expense ratio of 0.65%, currently trades at a slight premium to net asset value and has a bid/ask spread of 10%.
If you are going to buy the fund, a limit order makes sense. With $6 million in assets under management in its brief three-month history, look for Facebook to join its top 10 as soon as the IPO hits the street. For those looking for something broader in nature that also captures ownership in Hasbro, the Rydex S&P 500 Equal Weight Consumer Discretionary ETF (NYSE:RCD) fits the bill. Its expense ratio is 15 basis points lower than the Global X fund, and while most of the holdings are big names such as Whirlpool (NYSE:WHR) and Coach (NYSE:COH), it does have 20% of its assets in media companies. Most importantly, its volatility is far less than you’re likely to see in a pure social media play.
The bottom line: Two or three index ETFs are all you need for a successful investment portfolio. The funds mentioned above can meet your needs while also giving you a piece of your favorite companies — not a bad combination.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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