ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | January 14, 2013 12:59 pm

It wasn’t a spectacular week for stocks, but the S&P 500 was up 0.38% from Jan. 7 to Jan. 11, reaching another new five-year high. With last week’s gain, the index is up 3.2% year-to-date in just eight days of trading. InvestorPlace contributors are excited about the future, as evidenced by their stock recommendations. Here are my ETF alternatives for them.

InvestorPlace reader Steve Freehill’s submission for our 10 Best Stocks for 2013 [1]was a topic for discussion on Jan. 7. Freehill likes Two Harbors (NYSE:TWO[2]) so much that he bought the mortgage REIT’s stock in December. Even more impressive is that Two Harbors leads the 10-person competition so far, up 9% year-to-date. Two Harbors sports a normalized yield of 12% with opportunities for additional gains from its Silver Bay Realty Trust (NYSE:SBY[3]), which it spun off in December.

If you want to spread your bet a little bit, you have two mortgage REIT ETFs to choose from: the Van Eck Market Vectors Mortgage REIT Income ETF (NYSE:MORT[4]) and the iShares Mortgage REIT Capped ETF (NYSE:REM[5]). The iShares 30-day SEC yield is 13.1%, 200 basis points higher than Van Eck’s. However, Van Eck’s annual expense ratio is eight basis points less at 0.40%, and it has a slightly lower concentration in its top 10 holdings.

On Jan. 10, contributor Susan J. Aluise[6] highlighted four reasons why Celgene [7](NASDAQ:CELG[8]) is the real deal despite sporting a $93 stock and trading at an all-time high. The biopharma hopes to generate $12 billion in revenue and earnings per share of $14 by 2017. Aluise believes Celgene’s proven ability to deliver strong financial results in addition to new product introductions makes it mighty attractive.

Although Celgene is financially solid, and there are several biotech ETFs I could recommend, I’m generally leery about this industry.

Therefore, I’m going to suggest the First Trust Strategic Value Index Fund (NYSE:FDV[9]), which has Celgene as its top holding at a weighting of 2.47%. This particular ETF has a portfolio of 50 stocks that are equally weighted, chosen using Credit Suisse’s HOLT proprietary valuation scoring model.

Converting income and balance sheet statements into a cash flow return on investment (CFROI), HOLT is able to better gauge a company’s true economic performance. Over the past five years, FDV has averaged an annual total return of 4.7%, 150 basis points higher than the SPDR S&P 500 (NYSE:SPY[10]). At 0.65%, it isn’t cheap, but then again this isn’t just an ordinary ETF.

Sirius XM Radio’s (NASDAQ:SIRI[11]) been in the news a lot lately given CEO Mel Karmazin stepped down after John Malone’s Liberty Media (NASDAQ:LMCA[12]) gained control of the house that Howard Stern built[13]. Contributor Jonathan Berr[14] recommended the satellite radio operator on Jan. 10 due partly to its changing “Spice Radio” to the “Radio Sex” channel. Howard Stern made his name using sex to bring in listeners, and now SIRI is simply taking that to the next level. It’s not everyone’s taste, but that’s the beauty of satellite radio: There’s something for everyone.

This past September, I wrote that if you must own SIRI[15], you’re better to do so through Liberty Media. As Berr alluded to, Liberty Media ultimately will spin-off SIRI, so you’ll end up owning it eventually anyway.

To do this through an ETF, your best bet is to buy the PowerShares Dynamic Leisure and Entertainment Portfolio (NYSE:PEJ[16]), a concentrated group of 30 stocks with Liberty Media its No. 1 holding at 5.3%. The Dynamic Leisure and Entertainment Intellidex Index uses a combination of growth and value investment criteria to create a list of stocks, which the fund then rebalances and reconstitutes quarterly.

InvestorPlace Assistant Editor Marc Bastow[17] went out on a limb, also on Jan. 10, suggesting five reasons why he’s not crazy to own Yahoo [18](NASDAQ:YHOO[19]) stock. Included in his argument was CEO Marissa Mayer, hired away from Google (NASDAQ:GOOG[20]) last July. I believe the former Google star[21] will get Yahoo where it needs to go by focusing on the consumer. She’s hired some talented people to take its strengths and financially capitalize on them.

Forgive me if I offend any Google Finance aficionados, but Yahoo Finance is still a very valuable property. Bastow has put his money where his mouth is, and I think he’ll eventually be rewarded for his contrarian thinking.

Sometimes when I recommend ETF alternatives, I tend to go conservative and suggest a broader fund that holds a particular stock but isn’t tied into one specific industry. This isn’t one of those times. I think the pick is in a good industry, and so I suggest the PowerShares NASDAQ Internet Portfolio (NASDAQ:PNQI[22]), which invests in 67 Internet-related businesses, including Yahoo at a weighting of 3.84%.

Mid-cap and large-cap stocks account for 80% of the portfolio, with Amazon (NASDAQ:AMZN[23]) and Google in the top five holdings. Over the past three years through the end of 2012, the fund has delivered a 17.1% return, 620 basis points higher than the S&P 500.

Last up, Dividend Growth Investor[24] examined the dividend story behind Stryker (NYSE:SYK[25]), the Kalamazoo-based medical technology company. Stryker’s dividend payment has increased by 33.5%[26] annually over the past decade. Despite consistently increasing its dividend payment, Stryker’s annual total return over the past decade (through January 11) is a bit of good and bad news combined.

While it underperformed the S&P 500 by 70 basis points, it outperformed its medical device peers by 260 basis points. Long-term, with almost $2 billion in free cash flow, it should be able to keep raising its dividend payout above the current 23%.

Not completely sold on Stryker and the rest of the medical devices industry, at least in terms of stock appreciation, I’m going to recommend the Vanguard Dividend Appreciation ETF (NYSE:VIG[27]), which replicates the performance of the Dividend Achievers Select Index. The fund itself comprises 134 stocks that have increased their dividend payments in each of the last 10 years or longer.

The ETF has Stryker at a weighting of 1.02%, which puts it outside the top 25 holdings. However, it’s important to keep in mind that the fund’s SEC 30-day yield is 2.3%, 80 basis points higher than the current yield for Stryker. If you’re a dividend investor, this ETF makes a lot more sense.

As of this writing, Will Ashworth didn’t own any securities mentioned here. 

Endnotes:
  1. 10 Best Stocks for 2013 : http://investorplace.com/best-stocks-for-2013/
  2. TWO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWO
  3. SBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBY
  4. MORT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MORT
  5. REM: http://studio-5.financialcontent.com/investplace/quote?Symbol=REM
  6. Susan J. Aluise: http://investorplace.com/author/susan-j-aluise/
  7. four reasons why Celgene : http://investorplace.com/2013/01/4-reasons-celgene-is-the-real-deal/
  8. CELG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CELG
  9. FDV: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDV
  10. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  11. SIRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIRI
  12. LMCA: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMCA
  13. the house that Howard Stern built: http://investorplace.com/2013/01/sirius-xm-radio-gets-kinky/
  14. Jonathan Berr: http://investorplace.com/author/jonathan-berr/
  15. if you must own SIRI: http://investorplace.com/2012/09/liberty-media-wants-to-get-sirius-should-you-lmca-siri/
  16. PEJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEJ
  17. Marc Bastow: http://investorplace.com/author/marc-bastow/
  18. he’s not crazy to own Yahoo : http://investorplace.com/2013/01/5-reasons-why-i-just-bought-yahoo-yhoo-msft-aol-amzn-goog/
  19. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  20. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  21. I believe the former Google star: http://investorplace.com/2012/08/marissa-mayer-sets-her-own-course-for-yahoo/
  22. PNQI: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNQI
  23. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  24. Dividend Growth Investor: http://investorplace.com/author/dividend-growth-investor/
  25. SYK: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYK
  26. dividend payment has increased by 33.5%: http://investorplace.com/2013/01/stryker-provides-a-long-standing-dividend-history-syk-jnj-snn-zhm/
  27. VIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIG

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