by Will Ashworth | July 22, 2013 2:47 pm
The S&P 500 closed out the week of July 15-19 up fractionally, and has now gained 18.6% year-to-date. After four years of a bull market, you might think InvestorPlace contributors would have run out of ideas. Thankfully, they haven’t.
Here are my ETF alternatives for some of last week’s recommendations:
Aaron Levitt always has something interesting to say about the energy business. On July 16, he was discussing the precipitous fall in the number of rigs looking for natural gas since 2011. With natural gas prices coming to life in the past few months, energy producers are increasingly willing to invest capital to boost output. That means more rigs are needed, which translates into new business for contract drillers. Aaron has three in mind: Patterson-UTI Energy (PTEN), Helmerich & Payne (HP) and Precision Drilling (PDS). The first two are easily obtained in ETFs, while Precision Drilling is a Canadian company with little representation from U.S. funds.
The energy ETF to own in this instance is the First Trust Energy AlphaDEX Fund (FXN), which seeks to replicate the performance of the StrataQuant Energy Index. The index uses growth and value factors to rank energy stocks in the Russell 1000, then place them into different quintiles, which determines their weight. The 56-holding fund is reconstituted and rebalanced quarterly, which explains the 0.7% expense ratio. Patterson-UTI is the largest holding with a weighting of 3.27%, while Helmerich & Payne chimes in at 3.08%.
Continuing the energy sector picks, Dividend Growth Investor discussed how to boost dividend yield from master limited partnerships while maintaining the quality of holdings. The article argues that, despite a low-interest-rate environment, 4% is still a mediocre yield for MLPs. But the recommendation replaces one stock with three, so unless you’re confident enough to pick these three stocks, let alone one, an ETF alternative makes a lot of sense.
All three of the recommendations are held within the First Trust North American Energy Infrastructure Fund (EMLP), which invests primarily in publicly traded MLPs and other companies that derive at least 50% of their revenues from operating or servicing infrastructure assets such as pipelines and storage facilities. The fund has a total of 51 holdings, with Kinder Morgan Management (KMR) as the second-largest weighting at 7.64%. If you must secure a 4% yield from your MLP investment, EMLP will most likely be a disappointment as its distribution rate as of the end of June is 3.37%. Also, keep in mind that the fund’s expense ratio is high — 0.95% annually.
Jeff Reeves was busy July 17 explaining why the triple-digit stock prices of five very well-known companies are no big deal. While Google (GOOG) has been on a tear this year, its Q2 earnings were a disappointment. At more than $900 per share, any extended slump in mobile could be harmful to its future share price. Facebook (FB) took a pounding after its IPO for exactly the same problem. All five of the companies have quality businesses. Unfortunately, like the Apple (AAPL) retreat, you just don’t know when it’s going to happen. Buying an ETF can reduce that risk.
With the exception of AutoZone (AZO), all of these stocks are widely held within ETFs. So, rather than come up with an ETF that has all five, I’m going to recommend the Columbia Select Large Cap Growth ETF (RWG), an actively managed fund that has three of the five stocks in its 55 holdings — Priceline (PCLN), LinkedIn (LNKD) and Google — plus Visa (V) rather than MasterCard (MA). Performance-wise, RWG is just now starting to come around, up 21.1% YTD compared to 17.5% for the Russell 1000, its benchmark.
On July 18, Tom Taulli contemplated the three pros and three cons of owning IBM’s (IBM) stock. With a 2% dividend yield and a reasonable P/E ratio, this tech giant earned a “buy” recommendation. The stock has barely moved in 2013, up 2% YTD through, and has been dead money for more than a year now. I wouldn’t dive into IBM considering there are better options available in the IT space, but for those lusting after Big Blue, an ETF alternative makes a lot of sense.
I’m going to recommend a nice, inexpensive fund — the Vanguard Mega Cap Growth ETF (MGK), which charges an annual expense ratio of 0.12%. IBM is the third-largest holding with a weighting of 4%. MGK — which holds 138 stocks and has $1 billion in net assets — has been in existence since December 2007 and has achieved a similar return to the S&P 500 in that time. Whether you buy this fund or the SPDR S&P 500 ETF (SPY), which has a much smaller IBM weighting, I believe you are making a smarter bet on IBM specifically and mega caps in general.
Completing the energy trifecta, Aaron Levitt discussed energy infrastructure July 18. He specifically was interested in Phillips 66′s (PSX) spinoff of a 23% stake in Phillips 66 Partners, an MLP focused on the acquisition of pipelines. Levitt believes this IPO could be one of the big successes in 2013, suggesting investors consider buying shares on the first day of trading.
For those not so sure about owning this IPO, might I suggest an ETF that owns Phillips 66 instead. The First Trust US IPO Index Fund (FPX) owns Phillips 66 with a weighting of 4.71%. FPX has become one of my favorite ETFs for the simple reason that it performs unbelievably well. Since its inception in April 2006, it has achieved an annualized total return of 9.42%, considerably better than the S&P 500.
If I could only own one ETF, this would probably be it.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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