ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | December 3, 2012 3:59 pm

With some experts suggesting the past two weeks’ gains have come on speculation of a fiscal cliff deal, it seems doubtful the markets have much upside unless something is announced. Until then, it’s going to be tough slugging.

It’s a difficult thing to pick winners in this kind of environment, but InvestorPlace contributors suggested a few attractive plays last week. If you like their flavor but want to add a little protection, consider these ETF alternatives instead:

Sally Beauty

Beauty was on the mind of Lawrence Meyers last week — specifically, Sally Beauty Holdings (NYSE:SBH[1]), a retailer and distributor of beauty supplies[2].

Like every company, Sally it has its pros and cons. Sally’s weakness is its burdensome $1.6 billion debt. A peer that’s also done well in the past year is Ulta Salon (NASDAQ:ULTA[3]), which has combined the retailing of cosmetics with an in-house beauty salon, and it has experienced big-time growth without any debt.

To get both (and more), you’ll want to buy the SPDR S&P Retail ETF (NYSE:XRT[4]), which is a modified equal-weight fund with 93 holdings[5]. Its five-year annualized total return as of the end of November is 13.8% compared to 1.3% for the S&P 500 — at 0.35% in expenses, you’re getting one of the most consistent ETFs around.

Big-Box Retailers

James Brumley took a look at Walmart (NYSE:WMT[6]) and Costco (NASDAQ:COST[7]) Nov. 28, suggesting Walmart’s lower stock valuation[8] trumps Costco’s recently announced special dividend of $7. I tend to prefer Costco over Walmart because it treats its employees better than Walmart; good customer service usually begins by treating your employees well.

However, if you feel the way Brumley does, you”ll want to pick up the Van Eck Market Vectors Retail ETF (NYSE:RTH[9]), which is a far more concentrated portfolio with just 25 holdings compared to 93 for the XRT. Walmart is the No. 1 holding at 13.5%; Costco is No. 6 at 5.1%. This is a more appropriate ETF for conservative investors; with 91% of its assets in large-cap stocks compared to just 17% for the XRT, you’re trading some long-term performance for peace of mind.

Spanish Banks

The European Central Bank’s infusion of 40 billion euros[10] into Spain’s financial sector should help the prospects of two banks that aren’t even receiving funds — Banco Bilbao Vizcaya Argentaria (NYSE:BBVA[11]) and Banco Santander (NYSE:SAN[12]), both of which have lost plenty of ground since the highs before the European bank crisis.

Given all the problems Europe’s facing right now — including 25% unemployment — it’s probably wise to limit your European exposure as much as possible. I’d recommend the Van Eck Bank and Brokerage ETF (NYSE:RKH[13]), which has Banco Santander in the top 10 holdings at a weighting of 4.7%, but also owns JPMorgan Chase (NYSE:JPM[14]), Wells Fargo (NYSE:WFC[15]) and three Canadian banks in the top 10. At an annual expense ratio of 0.35%, you gain global exposure to the financial sector in return for reasonably inexpensive fees.

Energy

Despite the world’s increasing thirst for energy, many of the companies providing services to the exploration and production industry have been floundering for some time. Aaron Levitt believes that Cameron International‘s (NYSE:CAM[16]) focus on deepwater offshore drilling[17] sets it apart from the rest of its peers. He sees a great deal of potential for the company, and its stock is cheap to boot.

The ETF to own in this instance is the Dow Jones U.S. Oil Equipment & Services Index Fund (NYSE:IEZ[18]), which charges 0.47% to replicate the investment results of the Dow Jones U.S. Select Oil Equipment & Services Index. Cameron International has a 4.5% weighting, making it the seventh-largest position out of 47 stocks. One-fifth of the fund’s assets are invested in oil services giant Schlumberger (NYSE:SLB[19]), which Levitt suspects has entered into a joint venture with Cameron as a precursor to an eventual deal.

Owning this ETF allows you to win no matter what happens between the two companies.

Disney

On Nov. 30, InvestorPlace Assistant Editor Marc Bastow discussed Disney‘s (NYSE:DIS[20]) 25% increase in its quarterly dividend[21]. It currently yields 1.5%, which isn’t that impressive … though it also has gained 34% in the past 52 weeks, outperforming many of its peers. However, I believe Disney could deliver even more value to shareholders by spinning off ESPN[22] — and I think it’ll eventually happen.

To make sure you don’t miss out (while also maintaining a diversified portfolio), I’d suggest you have a look at the Consumer Discretionary Select Sector SPDR (NYSE:XLY[23]), which at 0.18% in fees provides you with an inexpensive option for owning the media conglomerate. Disney is the fund’s fourth-largest holding at 6.1% of the 83-stock portfolio. While XLY hasn’t performed as well over the long haul as the aforementioned XRT, year-to-date it’s up 23%, 130 basis points higher than the XRT.

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

Endnotes:
  1. SBH: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBH
  2. beauty supplies: http://investorplace.com/2012/11/a-stock-so-boring-its-beautiful-sbh/
  3. ULTA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ULTA
  4. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT
  5. a modified equal-weight fund with 93 holdings: http://investorplace.com/2012/11/5-retail-etfs-to-browse-before-black-friday/
  6. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  7. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  8. lower stock valuation: http://investorplace.com/2012/11/discounting-deathmatch-wal-mart-vs-costco/
  9. RTH: http://studio-5.financialcontent.com/investplace/quote?Symbol=RTH
  10. infusion of 40 billion euros: http://investorplace.com/2012/11/bailout-boosts-bullish-case-on-spanish-banks/
  11. BBVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBVA
  12. SAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAN
  13. RKH: http://studio-5.financialcontent.com/investplace/quote?Symbol=RKH
  14. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  15. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  16. CAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAM
  17. deepwater offshore drilling: http://investorplace.com/2012/11/an-energy-success-story-under-the-sea-cameron-international-cam/
  18. IEZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=IEZ
  19. SLB: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLB
  20. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  21. 25% increase in its quarterly dividend: http://investorplace.com/2012/11/a-mouse-size-step-for-disneys-dividend/
  22. spinning off ESPN: http://investorplace.com/ipo-playbook/should-disney-spin-off-espn-yes/
  23. XLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLY

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