by Will Ashworth | April 22, 2013 3:22 pm
The markets were in full retreat for the week of April 15-19, as the S&P 500 lost 2.1%.
While the markets appear to be taking a breather; the InvestorPlace crew was busy recommending stocks for our readers. Here are my ETF alternatives for those picks.
It’s not often that you think dividends when contemplating small-cap investments. However, InvestorPlace editor Jeff Reeves has come up with five such beauties that average a 5% dividend altogether. All financially-focused companies, four of them are on the verge of being mid-caps. I’ll focus on Aircastle (NYSE:AYR), which leases commercial aircraft to airlines around the world. With a fleet of 159 planes including 101 from Boeing (NYSE:BA), it had a good year in 2012 with adjusted EBITDA increasing 7% to $648 million. The leasing business being what it is, companies are always in need of capital (planes are expensive) and are incredibly reliant on the airlines for their success. Luckily, both factors appear to be in Aircastle’s favor.
Finding an ETF that owns Aircastle in a meaningful way is a near-impossible task. As a result, I believe your best bet is the iShares Russell 2000 ETF (NYSE:IWM), which is a total of 1961 holdings seeking to replicate the performance of the Russell 2000. Although cap-weighted, the top 10 holdings account for just 3% of the $20 billion in total net assets. Aircastle is weighted at 0.06%, just 27 basis points less than the ETF’s top holding. In addition to Aircastle, one of Jeff’s other stock picks — Two Harbors Investment Corp. (NYSE:TWO) — is also held in the fund. At an expense ratio of 0.23%, it’s a great way to gain exposure to some of America’s smallest stocks.
Profit-taking was on the minds of investors this past week. The Johnson Research Group noted that the recent increase in short selling has made it more difficult to come up with short-squeeze candidates. However, it was able to produce a list of three choices including Discovery Communications (NASDAQ:DISCA) — a company that I’m a big fan of, thanks to its partnership with Oprah Winfrey. With the Oprah Winfrey Network making money these days, things are only going to get better and better for the Discovery Communications.
The obvious fund in this instance is the PowerShares Dynamic Media Portfolio (NYSE:PBS), which invests in 30 U.S. media companies including DISCA at a weighting of 5.1%. DISCA is the fourth-largest holding behind Walt Disney (NYSE:DIS), Time Warner (NYSE:TWX) and Yahoo (NASDAQ:YHOO). While it’s done significantly better than the S&P 500 over the past five years, PBS hasn’t kept pace with the S&P Media Index. Nonetheless, if you want to capture DISCA and the other major players in American media, this is the way to go.
With both Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) releasing first quarter earnings last week, the beverage industry has been at the front of investors’ minds. On April 18, I looked at the various tentacles of Coke around the world. Of those businesses in partnership with Coca-Cola, the one most intriguing for me is Femsa (NYSE:FMX), the Mexican conglomerate that owns 49% of Coca-Cola Femsa (NYSE:KOF), 20% of Heineken (PINK:HINKY), and all of Oxxo convenience stores. Its focus on Latin America is a winning proposition.
At first glance, I’m tempted to invest in a Mexico-centric ETF to gain as large an exposure to FMX as possible. The iShares MSCI Mexico Capped ETF (NYSE:EWW) has FMX at a weighting of 9.12%. However, I specifically like Femsa because of its investments in Central and South America. For that reason I’m going to recommend the iShares Latin America 40 ETF (NYSE:ILF), a group of 40 large-cap stocks from five countries (Brazil, Chile, Colombia, Mexico, and Peru), which represents a snapshot of investable Latin America. FMX is the seventh-largest holding with a weighting of 4.83%. I’d like it to be higher, but the added diversification beyond Mexico is more important than the extra 500 basis points of ownership.
It’s easy to forget about PriceSmart (NASDAQ:PSMT), the Latin American version of Costco (NASDAQ:COST). It now has 30 locations in 12 countries including five in Costa Rica, and the potential in all of these markets is tremendous. Lawrence Meyers loves PriceSmart’s business but thinks its stock is expensive at the moment. For this reason an ETF alternative makes perfect sense.
I’d love to grab a Latin American ETF in this situation but PSMT is based in San Diego so it gets missed by emerging market ETFs. Instead we’ll go with the PowerShares Dynamic Retail Portfolio (NYSE:PMR), which invests in 30 U.S. retail stocks. PriceSmart’s weighted at 2.9% of the $24 million in total net assets, while Kroger (NYSE:KR) is the top holding at 5.53% of the portfolio. That’s not an inspiring choice for the top holding, but Costco is in the top 10 with a weighting of 4.83%, giving you PriceSmart and its cousin.
Closing up last week’s group of ETF alternatives, Crossing Wall Street editor Ed Elfenbein suggested that Microsoft’s (NASDAQ:MSFT) solid earnings report was ample evidence that its stock is a bargain. Thanks to cost cutting and a very strong Xbox business, it was able to grow revenues and earnings by 18% and 19% respectively in the third quarter. Despite all the bad publicity about poor PC sales, there’s still plenty of life left in the Seattle tech giant. With a 3.2% dividend, Microsoft’s a good choice for income investors.
There are plenty of ETF alternatives for Microsoft. However, I’ll focus on the dividend aspect of its stock rather than the technology angle. Vanguard’s High Dividend Yield ETF (NYSE:VYM) holds Microsoft in the fifth-largest position at a weighting of 3.2%. Charging just 0.10% annually with a SEC 30-day yield of 3.13%, it’s an excellent way to capture Microsoft and earn a reasonable amount of income at the same time. All income investors should consider this $7.5 billion fund.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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