ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | June 18, 2012 1:48 pm

Markets rallied last week as global bank regulators indicated they would consider allowing banks greater leeway in the variety of assets they could use to meet liquidity buffers. Sporting a second consecutive week of gains, the S&P 500 was up 1.3% on the news. InvestorPlace contributors came up with lot of interesting recommendations in that time. Here are my ETF alternatives to some of those picks:

REITs

Leading off the week, Editor Jeff Reeves[1] provided investors with five REITs trading under $10[2] with huge dividend yields. These payouts vary from a low of 5.3% for Ashford Hospitality Trust (NYSE:AHT[3]) to a high of 17% for the Armour Residential REIT (NYSE:ARR[4]), and together, these five stocks average a yield of 10.3%. All five of these REITs are smallish in size in terms of market cap and do present some future risk of diminished distributions.

The best alternative is the IQ US Real Estate Small Cap ETF (NYSE:ROOF[5]), which owns all five stocks, with Armour Residential REIT in the top 10 holdings. ROOF tracks the performance of the IQ US Real Estate Small Cap Index and yields about 6.9%. While ROOF doesn’t give you quite the same yield as the five Jeff recommended, it does provide you exposure to 43 stocks — and thus a lot more diversification.

Dollar Stores

On Tuesday, Marc Bastow revisited the continuing trend toward discount stores[6]. Discussing the big three — Dollar General (NYSE:DG[7]), Dollar Tree (NASDAQ:DLTR[8]) and Family Dollar Stores (NYSE:FDO[9]) — Bastow remarked about how well these stores serve the local population compared to Wal-Mart (NYSE:WMT[10]) and Target (NYSE:TGT[11]). Because all three have hit 52-week highs in recent weeks, an ETF alternative makes a lot of sense.

My suggestion here is to go with the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSE:RCD[12]), which owns both Family Dollar Stores and Dollar Tree in its top 10 holdings. Because it’s an equal-weight fund, their weightings are 1.64% and 1.52%, respectively. The ETF has 81 stocks, with the smallest holding being Fossil (NASDAQ:FOSL[13]) at 0.76%. The only downside to RCD is it doesn’t hold Dollar General.

Dr Pepper Snapple Group

June 13 was hump day, and Tom Taulli was craving a soda[14] in the form of Dr Pepper Snapple Group (NYSE:DPS[15]). Taulli presented a pros-and-cons analysis of the beverage maker, and when everything was laid on the table, he concluded that DPS’ stock price is reasonable at 16 times earnings, its dividend yield is attractive at more than 3% and its margins should improve as commodity prices continue to stabilize.

For those who weren’t quite sold by his arguments, but believe consumer staples should be a part of your portfolio, take a look at the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS[16]), which holds Dr Pepper Snapple in its top 10 at 2.67%. This fund has just 41 holdings compared to 81 for its previously mentioned equal-weight stablemate. Both funds have an expense ratio of 0.5%.

Michael Kors

Lawrence Meyers was simply gaga Thursday over Michael Kors‘ (NYSE:KORS[17]) fourth-quarter report. Especially exciting was the luxury retailer’s performance in Europe[18], where it grew same-store sales 13.6% in the quarter and 22% in the fiscal year ended March 31. That’s on top of a 13.7% increase a year earlier. Business certainly is looking good for the Hong Kong-based company. However, some investors have expressed concerns about what effect Wednesday’s expiration of its lockup will have on the stock’s price, which for many is already overvalued. If you’re in this camp, an ETF alternative will take the sting out of any selling pressure that might exist in the short term.

An interesting fund for growth investors is the Columbia Large-Cap Growth Equity Strategy Fund (NYSE:RWG[19]), which is an actively managed ETF that looks to invest in companies within the Russell 1000 that exhibit attractive fundamentals and other quantitative qualities. In addition to sporting Michael Kors in its top 10 holdings, it also has Lululemon (NASDAQ:LULU[20]), the ultra-hot activewear and yoga retailer. RWG charges 0.79% in expenses.

Railroads

Here in Canada, we’re very familiar with freight railways[21] thanks to Bill Ackman’s highly publicized move to replace Canadian Pacific Railway‘s (NYSE:CP[22]) CEO. On Friday, Susan J. Aluise was talking up CSX (NYSE:CSX[23]), Norfolk Southern (NYSE:NSC[24]) and Union Pacific (NYSE:UNP[25]). All three have dividend yields over 2%.

I recommended[26] either Berkshire Hathaway (NYSE:BRK.B[27]) or the iShares Dow Jones Transportation Average Index Fund (NYSE:IYT[28]) in March when she last touted railroads, and I’m not changing my tune. All aboard!

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Endnotes:
  1. Jeff Reeves: http://investorplace.com/author/jeff-reeves/
  2. five REITs trading under $10: http://investorplace.com/2012/06/5-reits-under-10-with-huge-dividends-aht-arr-dx-cxs-irc/view-all/
  3. AHT: http://studio-5.financialcontent.com/investplace/quote?Symbol=AHT
  4. ARR: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARR
  5. ROOF: http://studio-5.financialcontent.com/investplace/quote?Symbol=ROOF
  6. continuing trend toward discount stores: http://investorplace.com/2012/06/dollar-retail-stores-dltr-dg-fdo/
  7. DG: http://studio-5.financialcontent.com/investplace/quote?Symbol=DG
  8. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR
  9. FDO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDO
  10. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  11. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  12. RCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=RCD
  13. FOSL: http://studio-5.financialcontent.com/investplace/quote?Symbol=FOSL
  14. craving a soda: http://investorplace.com/2012/06/should-i-buy-dr-pepper-snapple-dps-3-pros-3-cons
  15. DPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPS
  16. RHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=RHS
  17. KORS: http://studio-5.financialcontent.com/investplace/quote?Symbol=KORS
  18. the luxury retailer’s performance in Europe: http://investorplace.com/2012/06/michael-kors-bucks-consumer-spending-trend/
  19. RWG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RWG
  20. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  21. freight railways: http://investorplace.com/2012/06/3-railroad-stocks-that-keep-rolling/
  22. CP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CP
  23. CSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSX
  24. NSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSC
  25. UNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNP
  26. I recommended: http://investorplace.com/2012/03/etf-alternatives-for-the-week-of-march-12-16/
  27. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  28. IYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYT

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