ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | September 4, 2012 9:00 am

The last trading week of the summer season was uneventful, with the S&P 500 declining by 0.32% on light volume. It’s been a good summer, though, as the benchmark index rose 10% from its lows in June and is now up 11.9% year-to-date with two-third’s of 2012 in the books.

With Fed Chairman Ben Bernanke ready to prop up the economy[1], the markets should continue their gradual move upward, and InvestorPlace contributors were at the ready this past week with plenty of stock recommendations. Here are my ETF alternatives for those picks.

Starting off the week, Tom Taulli[2] found himself liking IAC/Interactive’s (NASDAQ:IACI[3]) $300 million acquisition[4] of About.com as yet another addition to Barry Diller’s Internet empire. Content to cobble together a valuable group of digital properties slightly below the radar rather than running a major studio, IAC/Interactive continues to provide shareholders with above-average returns.

I’m not a big fan[5] of Barry Diller, but folks who are should consider the PowerShares Dynamic Media Portfolio (NYSE:PBS[6]), which comprises 30 of the top U.S. media companies, including IAC/Interactive, which represents 2.8% of the portfolio. It’s not cheap at 0.63% annually. However, its performance in recent years has been superior to the S&P 500. If you like media, this is the perfect fund.

On Tuesday, InvestorPlace Editor Jeff Reeves[7], with some help from his friends, was recommending no less than six stocks to buy[8] once the markets cool and the inevitable sell-off begins. Out of the six picks, only two really do it for me: Target (NYSE:TGT[9]) and ServiceNow (NYSE:NOW[10]). Target’s Canadian expansion is going to be very successful, much like when Walmart (NYSE:WMT[11]) entered Canada in the 1990s. As for ServiceNow, it’s up 72% since its IPO in late June. Cloud computing is the future of business, and ServiceNow is right in the middle of the action. Its stock will do very well once it starts making money.

My ETF alternative for Target is the Consumer Discretionary Select SPDR Fund (NYSE:XLY[12]). It has Target at a weighting of 3.03% and is a top 10 holding. In addition, the fund is dirt cheap at 0.18%, and it has wiped the floor versus the S&P 500 over the past 10 years.

For ServiceNow, few funds hold it to any degree,  with the exception of the iShares NYSE Composite Index Fund (NYSE:NYC[13]), which barely registers at a weighting of 0.03%. Your two alternatives would be the First Trust ISE Cloud Computing Index Fund (NASDAQ:SKYY[14]), which focuses on companies competing in the cloud, and the First Trust US IPO Index Fund (NYSE:FPX[15]), which will likely hold ServiceNow sometime in the future.

Midweek, Assistant Editor Kyle Woodley[16] was in the mood for fresh bread and pastries[17]. No company does this segment better than Panera (NASDAQ:PNRA[18]), which has 1,600 locations throughout North America. In Toronto, where I live, Panera is undertaking a big expansion that should see it with 10 locations here by the end of 2012.

While Woodley quibbles with Panera’s operating profits, you can’t argue with its stock’s success, up 27% annually over the past 15 years. I agree that its superhuman performance makes Panera a very volatile stock, especially around earnings announcements.

Therefore, a much safer play would be to own the PowerShares Dynamic Leisure and Entertainment Portfolio (NYSE:PEJ[19]), which has 30 holdings, including Panera at a weighting of 2.81%. Its performance compared to the S&P 500 has been superior over the last five years. With top 10 holdings like Time Warner (NYSE:TWX[20]) and Marriott International (NYSE:MAR[21]), it offers much more than just fast casual in its arsenal.

The second-to-last trading day in August had Assistant Editor Marc Bastow[22] contemplating an investment in Amazon (NASDAQ:AMZN[23]) despite its incredible P/E ratio of 300 times trailing earnings[24]. Some stocks are able to suspend reality for long periods of time, and Amazon is one such company. Its business is continually changing, and nobody has been able to match its innovation since its founding in 1994. The bet moving forward is whether Amazon will continue to lead the way.

To hedge your bet, the First Trust Dow Jones Internet Index Fund (NYSE:FDN[25]) is an excellent alternative, with 41 stocks in its portfolio, including Amazon at 8.19%. Only Google (NASDAQ:GOOG[26]) rates higher at 10.99%. Everyone considers Amazon a retail company, but it’s really a tech business providing retail services. Morningstar gives it a 5-star rating over the past five years. That’s as good as it gets.

I couldn’t go an entire week without referring to some of Portfolio Grader[27]‘s top stock picks[28]. On Friday it was recommending three chemical stocks: KMG Chemicals (NYSE:KMG[29]), Cytec Industries (NYSE:CYT[30]) and Eastman Chemical (NYSE:EMN[31]). While chemical stocks don’t get my heart pumping, they do play an important role in the economy and are welcome in almost any portfolio.

The First Trust Materials AlphaDEX Fund (NYSE:FXZ[32]) is an ETF that uses growth and value factors to select stocks from the Russell 1000 Materials and Processing Index. The bottom 25% of the companies on this list are discarded, and the rest are weighted based on the fund’s rankings. Eastman Chemical is just outside the top 10 holdings at 2.57%. The ETF’s annual expense ratio is 0.70%, which would be on the pricey side were it not for the fundamental rankings undertaken as part of its composition. If you want materials in your portfolio, this is the ETF to own.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

Endnotes:
  1. Ben Bernanke ready to prop up the economy: http://investorplace.com/2012/08/do-nothing-bernanke-is-dead-to-me/
  2. Tom Taulli: http://investorplace.com/author/tom-taulli/
  3. IACI: http://studio-5.financialcontent.com/investplace/quote?Symbol=IACI
  4. $300 million acquisition: http://investorplace.com/2012/08/believe-in-iac-bet-on-about-com-iaci-nyt/
  5. not a big fan: http://investorplace.com/2012/01/why-aol-is-a-better-bet-than-iacinteractive/
  6. PBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBS
  7. Jeff Reeves: http://investorplace.com/author/jeff-reeves/
  8. six stocks to buy: http://investorplace.com/2012/08/buy-these-6-stocks-when-the-inevitable-sell-off-hits/view-all/
  9. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  10. NOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOW
  11. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  12. XLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLY
  13. NYC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NYC
  14. SKYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SKYY
  15. FPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FPX
  16. Kyle Woodley: http://investorplace.com/author/kyle-woodley/
  17. fresh bread and pastries: http://investorplace.com/2012/08/panera-bread-could-continue-to-rise/
  18. PNRA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNRA
  19. PEJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEJ
  20. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX
  21. MAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAR
  22. Marc Bastow: http://investorplace.com/2012/08/amazons-future-deserves-a-present-day-buy-amzn/
  23. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  24. incredible P/E ratio of 300 times trailing earnings: http://investorplace.com/2012/08/amazons-future-deserves-a-present-day-buy-amzn/
  25. FDN: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDN
  26. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  27. Portfolio Grader: http://investorplace.com/author/portfolio-grader/
  28. top stock picks: http://investorplace.com/2012/08/3-chemicals-stocks-to-buy-now-kmg-cyt-emn/
  29. KMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMG
  30. CYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CYT
  31. EMN: http://studio-5.financialcontent.com/investplace/quote?Symbol=EMN
  32. FXZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXZ

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