by Will Ashworth | September 30, 2013 2:04 pm
The debt ceiling took over investor consciousness last week, leading to a 1.1% decline in the S&P 500 — its first weekly loss in the past four weeks. Experts suggest that until this issue is resolved, the markets are going to be extremely choppy.
Fear not: InvestorPlace contributors were busy this past week coming up with ways to beat this indecisive market. Here are my ETF alternatives:
Three particular midcaps were on the mind of Alyssa Oursler last week. Of the three, Hasbro (HAS) holds the most interest for me. HAS currently yields 3.3%, its operating cash flow has more than doubled since 2009, and its net debt is less than one times EBITDA. It can easily afford to keep increasing its dividend annually, which is great news for income investors. In addition, midcaps historically outperform both small- and large-caps.
At first I thought a good alternative would be a dividend-related fund, but then it occurred to me that most investors don’t have nearly enough midcap exposure. Therefore, I’m going with the WisdomTree MidCap Dividend Fund (DON), which gives you a little of both. DON has 368 holdings, including Hasbro at 0.7%. Sure, its 30-day SEC yield is 70 basis points lower than Hasbro’s, but it delivers much greater diversification, its expense ratio is just 0.38% and its performance over the long-term is superior to the S&P 500.
Dan Burrows believes that even though LinkedIn (LNKD), Netflix (NFLX) and Tesla (TSLA) have respectively doubled, tripled and quintupled in price this year, they’ve still got upside ahead. Technical analysis suggests these are momentum plays of the highest order. While this means there’s money to be made here — there’s the potential for money to be lost. For this reason, an ETF alternative in this situation makes all the sense in the world.
Unfortunately, Tesla throws a bit of a wrench into the proceedings, so I actually have to recommend two ETFs. The first is the First Trust Dow Jones Internet Index Fund (FDN), a Morningstar-ranked five-star fund of 41 Internet-related holdings including NFLX at a weighting of 3.52% and LNKD at 3.71%. For TSLA, I recommend going with the First Trust US IPO Index Fund (FPX), which also gets five stars. If you use ETFs exclusively, I’d consider the latter a core holding for your portfolio.
Carnival (CCL) is down almost 9%, which Jonathan Berr sees as the perfect opportunity to buy the cruise line’s stock — when it’s cheap. Righting the Costa Concordia was a brutal reminder of how bad things have been in recent years. A $10,000 investment in Carnival five years ago is worth $10,400 today. That’s called flat-lining. Still, one-fifth of travel agents surveyed feel 2013 is going to be their best year ever for cruises, so get in now while stock pessimism reigns supreme.
As Berr points out, an investment in Carnival is a long-term proposition. With that in mind, an ETF alternative like the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (RCD) makes sense. Hotels, restaurants & leisure stocks (Carnival among them) represent 13% of the portfolio’s 83 holdings. Because RCD is an equal-weight fund, Carnival will always (assuming it remains in the index) be an important part of this ETF. The only negative — it’s heavily weighted with retail stocks, which many analysts feel have had their day in the sun.
According to James Brumley, U.K. researchers are working on a universal flu vaccine that will eliminate the need for shots targeting multiple flu strains and will last longer than a year. Flu vaccines are a $7 billion business annually, so big firms like Sanofi (SNY) and Novartis (NVS) aren’t going to take this sitting down. Someone will need to manufacture this potential vaccine. Until such time, though, a firm like Sanofi — the market share leader — will continue manufacturing the stuff. Who the ultimate winner will be is really tough to determine. An ETF with Sanofi and some of the others would be a good hedge on your bet.
The best way to tackle this little dilemma without over-exposing yourself to pharmaceutical companies is to buy the Bldrs Developed Markets 100 ADR Index Fund (ADRD), a fund that invests in large caps based outside the U.S. but available here through ADRs. The 98-stock portfolio invests 16% of its assets in 13 healthcare stocks, including NVS with a weighting of 4.76% and SNY at 2.85%. Its performance since its inception in 2002 when compared to both the MSCI EAFE and S&P 500 isn’t terribly good, but its 30-day SEC yield of 2.6% and its 0.35% expense ratio are reasonable. I see ADRD as a good rest-of-the-world fund.
Aaron Levitt was talking spinoffs on Sept. 26. Specifically, he sees Noble Energy’s (NE) pending split into two firms: one for ultra-deepwater oil rigs and the other for shallower seas. Management expects the IPO for the new, shallow-seas operation, to be completed by the end of next year. Analysts see the two businesses delivering as much as $3.1 billion in EBITDA annually, which greater than the existing two businesses combined. Furthermore, since Levitt views Noble’s stock as undervalued compared to deepwater competitor SeaDrill (SDRL), now is the time to buy.
I’m assuming that when the spinoff occurs next year, the Guggenheim S&P 500 Equal Weight Energy ETF (RYE) — which holds Noble Energy at a weighting of 2.34% — the number of holdings in the ETF will go from 42 to 43. What I’m less certain about is whether either business will remain part of the S&P 500 once the overall business has shrunk in size sometime in 2014. It’s important only if you want to own both stocks after the separation. Otherwise, you’re simply owning RYE until the separation occurs and the value is unlocked.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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