ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | April 15, 2013 1:58 pm

ETF Alternatives for Last Week’s Hot Stocks

Last week was another strong one for the markets. The S&P 500 gained 2.3%, hitting an all-time high on Thursday and inching even closer to 1,600, while the Dow Jones Industrial Average continued to climb the walls of worry, besting its previous record on the same day.

Stocks slid slightly on Friday and are off to a rough start this week, but there’s still plenty to like in the markets. With that in mind, here are my ETF alternatives to some of last week’s most interesting stock recommendations.

Small Caps

Personally, small caps are my favorite investment. And as of last week, Jim Woods seemed to be on the same page. He recommended three stocks[1] on April 10: Orbitz Worldwide (NYSE:OWW[2]), WebMD (NASDAQ:WBMD[3]) and Zillow (NASDAQ:Z[4]). Of the trio, Zillow — which has been duking it out with Trulia (NYSE:TRLA[5]) — has seen the most upside in 2013, gaining around 86% year-to-date.

A good way to capture small-cap growth stocks while also owning a piece of Zillow is to buy the iShares Morningstar Small-Cap Growth ETF (NYSE:JKK[6]), which has 237 holdings including Zillow at 0.21%. I realize it’s not much of a weighting but since the top 10 holdings account for under 9% of the $93 million in total net assets, it’s about average.

The fund has solid performance, returning 11.6% year-to-date and 13.48% over the last 12 months. Heck, it’s performed about the same as stablemate iShares Russell 2000 Growth Index (NYSE:IWO[7]) despite having one-fifth the number of holdings. Plus, the expense ratio is manageable at 0.30%.

Lowe’s

Tom Taulli covered the pros and cons[8] of Lowe’s (NYSE:LOW[9]) last week as well, coming to the conclusion that its e-commerce and international business would drive future growth. With that in mind, there are two easy ways to play Lowe’s. First, you could choose an ETF that’s housing-related like the PowerShares Dynamic Building & Construction Portfolio (NYSE:PKB[10]).

Second, you could go for a retail ETF such as the Market Vectors Retail ETF (NYSE:RTH[11]). With housing-related stocks already gaining substantially in the last year, I would go with the latter. Lowe’s weighting of 4.7% puts it in the top 10 along with Home Depot (NYSE:HD[12]) and Walmart (NYSE:WMT[13]). Most importantly, the RTH is also 25 basis points cheaper than the PKB.

Carnival

InvestorPlace assistant editor Alyssa Oursler presented a compelling case[14] for buying Carnival’s (NYSE:CCL[15]) stock last week, reminding investors that the cycle of cruise disaster/stock drop/stock recovery has happened before. People will always take cruises, since they provide some of the best value in travel, so you should take advantage of temporary weakness and buy on the dip.

Of course, buyying an ETF is the perfect way to cushion the blow of any price adjustments due to mishaps at sea. The best way to play Carnival is to purchase the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSE:RCD[16]), which invests an equal amount in all 82 of the S&P 500s consumer discretionary stocks.

It’s somewhat expensive at 0.50%, but its performance absolutely thrashed the S&P 500 over the past five years on an annualized basis. Carnival’s weighting is 1.13%, which tells us its performance year-to-date is in negative territory. As Alyssa suggests, it’s ready for a bounce.

Business Development Corporations

Business development corporations provide debt and equity[17] to many smaller companies that banks won’t or don’t work with. What makes them attractive to investors is that they pay out 90% of their distributable cash flow in the form of dividends much like REITs, as Keith Fitz-Gerald pointed out last week. In fact, BDCs currently yield between 6.5% and 11% — making them very attractive to income-seeking investors. 

Keith recommended three BDCs, all held by the Market Vectors BDC Income ETF (NYSE:BIZD[18]), along with 22 other stocks including American Capital (NASDAQ:ACAS[19]) — the top holding with a weighting over 14%. Its management fee is reasonable at 0.40%, although there is also 7.16% in acquired fund fees and expenses.

These fees aren’t charged to the fund but rather incurred by the BDCs in their investment management. It’s possible they could affect future performance so that’s something to be aware of. Plus, the fund just got started in February so it has no track record. What it does have, though, is a 30-day SEC yield of 7.3%. That’s awfully tough to pass up.

AMC Networks

Our last recommendation comes from InvestorPlace assistant editor Adam Benjamin, who sees big things from AMC Networks (NASDAQ:AMCX[20]). It was spun-off from Cablevision (NYSE:CVC[21]) in 2011 and boasts The Walking Dead[22], the popular TV series about a zombie apocalypse.

While I can’t say I’ve seen it, apparently 7 million viewers are watching every Sunday. With several seasons left of the hit show and plenty of new projects in the works, AMC Networks indeed looks promising. A great way to play AMC Networks is to buy the Guggenheim Spin-Off ETF (NYSE:CSD[23]), which is a collection of under 30 stocks (yes, you guessed it) spun-off in the past 30 months with market caps less than $10 billion.

Replicating the performance of the Beacon Spin-Off Index, the performance of the fund over the last five years is excellent. And why wouldn’t it be? Spin-off’s tend to outperform the parent in the first 18 months as an independent company. AMC Networks’ weighting is 4.6% making it the eighth largest holding. With an expense ratio of 0.60%, you’re definitely paying for performance.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities. 

Endnotes:
  1. three stocks: http://investorplace.com/2013/04/3-high-flying-small-caps-with-plenty-of-altitude-left/view-all/
  2. OWW: http://studio-5.financialcontent.com/investplace/quote?Symbol=OWW
  3. WBMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=WBMD
  4. Z: http://studio-5.financialcontent.com/investplace/quote?Symbol=Z
  5. TRLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRLA
  6. JKK: http://studio-5.financialcontent.com/investplace/quote?Symbol=JKK
  7. IWO: http://studio-5.financialcontent.com/investplace/quote?Symbol=IWO
  8. pros and cons: http://investorplace.com/2013/04/should-i-buy-lowes-3-pros-3-cons/
  9. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  10. PKB: http://studio-5.financialcontent.com/investplace/quote?Symbol=PKB
  11. RTH: http://studio-5.financialcontent.com/investplace/quote?Symbol=RTH
  12. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  13. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  14. compelling case: http://investorplace.com/2013/04/now-is-the-perfect-time-for-a-cruise-stock/
  15. CCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCL
  16. RCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=RCD
  17. debt and equity: http://investorplace.com/2013/04/my-new-favorite-way-to-make-killer-income-bdcs-goog-aapl-blk-bks-htgc/view-all/
  18. BIZD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIZD
  19. ACAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACAS
  20. AMCX: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMCX
  21. CVC: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVC
  22. The Walking Dead: http://investorplace.com/2013/04/amc-network-still-offers-something-more/
  23. CSD: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSD

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