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Dip Into Dunkin: ETF Alternatives for Hot Stock Picks

This week we look at consumer staples, services, REITs, financial, and technology stocks.

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The S&P 500 was up 0.1% for the week of Oct. 28 through Nov. 1 — the fourth consecutive week of gains. The index is now up 25.7% year-to-date through Nov. 1. With the S&P 500 sitting three percentage points from its best year in a decade, InvestorPlace contributors were busy coming up with investment ideas to get you through the remainder of the year and into 2014. Here are my ETF alternatives for those picks.

Consumer Staples

Consumer staples had the best performance of any S&P 500 sector in October, up 6.6%. Perhaps that’s one of the reasons Dan Burrows chose to pick a winner between Procter & Gamble (PG) and Colgate-Palmolive (CL) Oct. 28. At the end of the day, Burrows recommends buying P&G over Colgate-Palmolive because its turnaround appears to be moving in the right direction — not to mention the stock is a better value at the moment. And besides, how can you bet against A.G. Lafley?

As Dan points out, neither stock is cheap, so an ETF alternative is great for this situation. The ETF I have in mind is the iShares U.S. Consumer Goods ETF (IYK), which seeks to replicate the performance of the Dow Jones U.S. Consumer Goods Index. The index includes stocks in the automobile, food producers, personal goods, tobacco and other consumer-related industries. With 119 holdings including both PG and CL in the top 10, the fund has been around for over 13 years. Although it’s not exactly cheap, at 0.45% annually, it has beaten the SPDR S&P 500 (SPY) over the past decade by 224 basis points annually. If you like PG, this is the fund you should choose.

Dunkin Brands

Tom Taulli sees tremendous growth opportunities for Dunkin Brands (DNKN). He especially likes the franchise model that keeps operating margins close to 50% on an adjusted basis. The company wants to double its stores to 15,000, and given the world’s seemingly insatiable appetite for coffee, I don’t imagine it will have a difficult time getting there. The big problem is maintaining quality across a much bigger network of stores. Starbucks (SBUX) went through some growing pains a few years ago, and its stores are primarily company-owned. I’d be careful when investing here.

Finding an ETF alternative to DNKN isn’t an easy task. As far as I can tell, there isn’t an ETF holding the coffee shop at a weighting greater than 1%. The closest you’ll come is the First Trust US IPO Index Fund (FPX), which has it weighted at 0.60% — the 37th largest holding out of 100. Normally, I probably wouldn’t recommend this as an alternative if you’re trying to capture its performance as closely as possible. However, the FPX is one of the best ETFs going; owning it will likely make you forget why you wanted DNKN in the first place.

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