by Will Ashworth | November 4, 2013 3:12 pm
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 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.
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.
Charles Sizemore assures us that Stag Industrial (STAG) is a good play in the small- and mid-cap REIT industry. The most compelling reason for owning its stock according to Sizemore: Six company officers bought in the past quarter, and all of them were open market purchases, not option exercises, etc. That kind of activity is a telltale sign that a stock might be cheap. And with a 5.5% yield, STAG also provides income investors with a reasonable dividend.
For an ETF alternative, I suggest a fund that I don’t believe I’ve ever recommended before — the PowerShares Premium Yield Equity REIT Portfolio (KBWY), composed of 33 small- and mid-cap REITs weighted by dividend yield. STAG is the sixth-largest REIT at a weighting of 3.83%. The third-largest holding is EPR Properties (EPR) at a weighting of 6.1% — a stock that I’ve liked for some time because of its focus on entertainment. The ETFs current distribution yield is 4.33%, which isn’t huge, but its performance over the past year is 913 basis points higher than the Vanguard REIT ETF (VNQ), the largest REIT ETF in terms of assets. In other words, it has some gusto.
I’ve recently started exploring the idea of using options to generate income. So Jim Woods’ recommendation to buy CBOE Holdings (CBOE) before its Q3 earnings caught my attention. CBOE is the largest options exchange in the US; it has been growing revenue and earnings at a reasonably strong clip. Although CBOE’s stock is up almost 70% over the past year, its technical chart still looks very bullish. I think Jim’s bang on when it comes to CBOE.
In order to get yourself some good exposure to CBOE, you need to invest in an ETF focused on capital markets. The iShares U.S. Broker Dealers ETF (IAI) has CBOE at a weighting of 4.39% — the 11th largest holding out of 22 stocks. Despite US stock ownership at 15-year lows, I see this collection of businesses doing well over the next 2-3 years. However, if you’re worried about the concentration, you might consider the PowerShares S&P MidCap Low Volatility Portfolio (XMLV), which invests in the 80 mid-cap stocks from the S&P MidCap 400 with the lowest volatility over the past 12 months. The stock with the lowest volatility of the 80 gets the biggest weighting and so on. CBOE comes in at 1.28%, only 39 basis points less than the largest holding in the fund. The downside — financials and utilities represent almost 70% of the portfolio.
Any time a stock is up 250% year-to-date, a pros and cons examination of that stock is usually going to have some headwinds. This past week, Carla Lake provided a dissenting vote on Netflix (NFLX) explaining that its valuation is just too darn high. She feels strongly that, as a middleman, its costs will never be kept in check long enough to make a reasonable profit. I personally feel Netflix is in a far stronger position today than it was 12-18 months ago. Who’s right? That’s an answer we won’t know for some time.
In the meantime you can sit on the fence by purchasing the First Trust ISE Cloud Computing Index Fund (SKYY), which is designed to track the performance of companies involved in cloud computing. It’s a modified equal-weight fund with stocks across the market-cap spectrum; Netflix is the third-largest holding at 4.33% of the portfolio. For those that can look beyond the cloud’s privacy issues, this fund has tremendous potential over the next 2-3 years. Not the least of which is thanks to Netflix.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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