Although September ended on a downer for the S&P 500, the third quarter was very successful, up 6%. As 2012′s final quarter gets under way, InvestorPlace contributors busied themselves last week for the year-end push. Here are some ETF alternatives to the stocks they discussed.
Up first is Bryan Perry, editor of Cash Machine, who sang the praises of business development companies like Prospect Capital (NASDAQ:PSEC) and Fifth Street Finance (NASDAQ:FSC), whose high yields make them irresistible to most money managers including David Einhorn. His Greenlight Capital (NASDAQ:GLRE) is Fifth Street Finance’s third-largest shareholder.
I’ve always liked BDCs because they lend to small and midsize businesses, something the big banks say they do, but we know isn’t true. An interesting ETF alternative from Wisdom Tree might be the ticket here. The Wisdom Tree SmallCap Dividend Fund (NYSE:DES) invests in small-cap dividend-paying companies. Based on the index of the same name, it has four BDCs in the top-10 holdings and a 30-day SEC yield of 4.04%. At an expense ratio of 0.38%, it’s a great way to play BDCs, dividends and small-cap stocks all at the same time.
Speaking of dividends, the Dividend Growth Investor highlighted the reasons Walgreen (NYSE:WAG) is a good investment at the moment. Trading at a reasonable valuation and doubling its dividend every five years, Walgreen has lots for income investors to like about the drugstore chains’ delivery of consistent results.
In the process of acquiring 45% of Britain’s Alliance Boots, look for Walgreen to make a play for Canada’s Shopper’s Drug Mart (PINK:SHDMF) in the near future. Given its 3% yield, most investors are buying Walgreen stock for the income.
Therefore, the appropriate ETF alternative is the SPDR S&P Dividend ETF (NYSE:SDY), which seeks to replicate the returns of the S&P High Yield Dividend Aristocrats Index. We’re talking about 83 large-cap stocks that combined pay a 30-day SEC yield of 2.92%. It’s not spectacular, but over the past five years, the fund has delivered a total return of 3.33%, 228 basis points higher than the S&P 500.
Despite Caterpillar (NYSE:CAT) cutting its 2015 profit forecast due to slower demand for its mining equipment, InvestorPlace‘s Dan Burrows is confident in its long-term future. Business might be waning at present, but once the global economy gets moving, Caterpillar is ideally positioned to benefit from the expansion.
Trading at $86.11 as of Sept. 28, CAT strikes Burrows as a bargain. For those wanting to hedge their bets, a much safer play is to buy the Dow Jones Industrial Average ETF (NYSE:DIA). It’s cheap at 0.18%, is a blue chip, has performed admirably over the years and has Caterpillar at a weighting of 4.92%. DIA is an oldie but a goodie.
InvestorPlace IPO Playbook editor Tom Taulli‘s best point regarding an investment in Carnival (NYSE:CCL) was his observation that cruising will be a popular travel choice for aging baby boomers because it’s a less costly, easier way to see the world. River cruising seems to be all the rage these days, so I’d expect Carnival to acquire one of the leading brands at some point.
However, events like the Costa Concordia‘s tragic capsizing remind investors of the risks involved in providing floating hotels. The best and cheapest way to play Carnival is to go with the Consumer Discretionary Select Sector SPDR (NYSE:XLY), whose performance has beaten the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSE:RCD) over the past five years. While I generally prefer equal-weight funds over market-cap funds, the proof is in its performance.
Finishing up my ETF alternatives, Dan Burrows was extremely positive Sept. 27 about Discover Financial Services (NYSE:DFS) after it easily beat Wall Street’s numbers for the third quarter. Forces pushing the stock higher include a credit card business that’s actually growing along with its entry into the mortgage market. DFS definitely has a lot of momentum.
However, I would be extremely hesitant to invest in its business due to the $214 million fine it received for pressuring customers to buy products they didn’t need. The company broke the law. For those who don’t see an ethical problem owning its stock, you might consider the Guggenheim S&P 500 Equal Weight Financial ETF (NYSE:RYF), which owns 81 equally weighted financial stocks with Discover Financial the top holding at 1.30%.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.