by Will Ashworth | March 18, 2013 2:39 pm
The big news last week was the Dow Jones Industrial Average‘s winning streak coming to a close at 10 days, its best run since 1996. Of course, all the major indices were up between March 11-15, including the S&P 500, which has gained more than 9% year-to-date.
We are in a bull market for certain, and that has InvestorPlace contributors very busy. Here are my ETF alternatives to their stock recommendations:
Yum! Brands (NYSE:YUM[1]) recently reported that China same-store sales declined 20% year-over-year in January and February on fears its chicken contained high levels of chemicals (it doesn’t). However, that was cause for a sigh of relief, as Yum originally estimated the decline would be as high as 25%. James Brumley has come to the conclusion that the short-term bumps in the road shouldn’t be a problem for the company long-term[2].
China still is a dicey proposition, so an ETF alternative that provides good exposure to Yum! Brands but also reduces some of the country and company risk makes a whole lot of sense. The iShares U.S. Consumer Services ETF (NYSE:IYC[3]) invests in 186 companies participating in the U.S. service economy, and Yum’s weighting is 1.47%. This particular ETF is capitalization-weighted, with Walmart (NYSE:WMT[4]) its largest holding at 5.64% and the top 10 accounting for 40.5% of the $355 million in total net assets.
The most interesting part of Lawrence Meyers’ discussion[5] in support of Tupperware (NYSE:TUP[6]) was the fact just 10% of its buyers are also distributors compared to 30% at Herbalife (NYSE:HLF[7]). That’s a huge deal given the stink Bill Ackman’s been raising about MLM business models; the 20% could be the difference between a legitimate business and ponzu scheme waiting to collapse. It doesn’t hurt that Tupperware increased its quarterly dividend in January to 62 cents per share. Despite a stock that’s within 5% of an all-time high, it’s still yielding more than 3%.
The best way to have your cake and eat it too is to invest in the iShares Select Dividend ETF (NYSE:DVY[8]), which is a beast of an ETF with $11.6 billion in total net assets. The DVY seeks to replicate the performance of the Dow Jones U.S. Select Dividend Index, which is 100 of America’s leading stocks, selected by dividend yield with screens for dividend-per-share growth rate, dividend payout ratio and average daily dollar trading volume. Tupperware’s weighting is 0.95%, which puts it in the middle of the pack. With an SEC 30-day yield of 4.1% and an expense ratio of 0.4%, DVY is a good way to capture both Tupperware and some additional dividend income.
On March 14, The Slant editor Jeff Reeves presented his case why investors should forget about General Motors’ (NYSE:GM[9]) bankruptcy and failure to launch post-IPO and instead focus on the fact it’s building great cars and totally undervalued[10]. He’s right on the money. However, the car business is a cash-intense proposition. In 2012, GM spent over $8 billion improving its business. At some point it needs to start generating greater free cash flow before it can seriously look at a dividend. Nonetheless, as Jeff states, it’s moving in the right direction.
One of my favorite ETFs is the First Trust US IPO Index Fund (NYSE:FPX[11]). Generally, I’m opposed to buying IPO stocks because they often drop below their original price within 12 to 24 months. However, this modified value-weighted fund does a great job keeping the holdings restricted to 100 quality companies. The reward for shareholders is above-average performance over the long haul. GM is the second largest holding at 7.09%; Facebook (NASDAQ:FB[12]) is No. 1. Amongst 1300 large growth funds, Morningstar gives FPX five stars over the past five years. The expense ratio of 0.6% is worth every penny.
It’s interesting that Tom Taulli was discussing the pros and cons of investing in Philip Morris International (NYSE:PM[13]) last week. I had just begun reading Barbarians at the Gate: The Fall of RJR Nabisco, a wonderful tale about the largest leveraged buyout of its time. Cigarette companies generate huge free cash flow[14], and Phillip Morris is no slouch with $8.4 billion in 2012. Unlike RJR Nabisco — which did the LBO because its stock was permanently stuck in neutral back in 1989 — Phillip Morris has averaged a 25% annual total return in each of the last three years.
However, if you want to hide among the weeds, afraid of what your conscience will think — not to mention what will happen if tobacco litigation ever goes seriously against the producers — I’d buy the Consumer Staples SPDR Fund (NYSE:XLP[15]) instead. It has Phillip Morris in the No. 2 spot with a 10.08% weighting. It’s enough of a position to continue to benefit from its free cash flow but not enough direct exposure to sink your financial ship from a direct hit. And of course its expense ratio is 0.18%, making it an extremely efficient investment.
Bryan Perry believes the good news in the job market, along with rising long-term interest rates, could heat up the housing and refinance markets further as consumers look to secure better credit terms in advance of any additional interest rate hikes. If this comes to fruition, Perry sees mortgage REITs benefiting[16] from this action. One mREIT Perry likes is Arlington Asset Investment (NYSE:AI[17]), a Washington D.C.-based firm that invests in residential mortgages backed by the federal government and currently delivers a 13.5% yield. Perry sees its shares as deeply discounted, so expect that yield to drop in the future.
If your heart is set on Arlington, you’ll have to buy a micro-cap ETF to gain exposure, which I would advise against. However, the interest in Arlington is its attractive yield. While you aren’t going to get 13.5% from an ETF, the PowerShares KBW High Dividend Yield Financial Portfolio (NYSE:KBWD[18]) has a 7.78% SEC 30-day yield, gives you a diversified portfolio of financial companies including several mREITs and only charges a management fee of 0.35%. Some of the holdings incur fees for investing in other funds and as such KBWD has acquired fund fees and expenses (“AFFE”) of 1.13%. The fund isn’t responsible for these fees but they could affect the performance of the companies in question. Lastly, 63% of the assets held in this ETF are small-cap in nature and therefore somewhat more volatile.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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