Recently, I compared the compensation of News Corp. (NASDAQ:NWSA) CEO Rupert Murdoch with that of Philipe Dauman, the highly paid Viacom (NYSE:VIAB) executive. My conclusion was that even though Viacom’s financial performance has been far superior to News Corp.’s, its return to shareholders has not. In fact, neither stock’s been very good. Nonetheless, investors continue to maintain a fondness for media stocks despite evidence that there are better places to put your money. For those who can’t break free of media, we provide some ETF alternatives. That way, you’ll get your media fix and a little diversification to boot.
If you want both companies included in the top 10 holdings of these ETF’s, your selection isn’t very wide. You’d have a much easier time in the mutual fund arena, but that’s a discussion for another day. Exactly five ETFs have News Corp. as a top 10 holding, and only three have Viacom. As I said, it’s slim pickings.
We’ll start with News Corp. By weighting, the PowerShares Dynamic Media Portfolio (NYSEARCA:PBS) has the largest representation, at 5.13% of total net assets. Three positions down, at a weighting of 4.90%, is Viacom’s Class B shares. This is the only ETF available where both stocks are in the top 10 holdings. If you require none to be in the top 10, your range of choice grows exponentially, but that somewhat defeats the purpose of this exercise, so let’s take a closer look at PowerShares Dynamic Media.
The portfolio has net assets of $117.2 million that are invested in 30 stocks, including News Corp. and Viacom. As ETF’s go, it’s relatively costly, with a net expense ratio of 0.63% annually. Although both companies are part of the services sector, PowerShares considers 75% of the fund invested in consumer discretionary stocks and 25% in information technology. However you want to describe it, PowerShares tracks the performance of the Dynamic Media Intellidex Index, which is most certainly all about media.
If yield is important to you, this fund’s not going to meet your needs. Its SEC 30-day yield is just 0.69%. That would be O.K. if its past performance were anywhere near decent, but that’s not the case. As of January 18, 2012, its five-year annualized return is -2.57% versus 0.43% for the S&P 500. It’s this kind of comparison that explains why so many media pundits and financial professionals recommend passive investing in well-known broad market indexes like the S&P 500. The results are superior at a lower cost. About the only thing going for PowerShares is its diversification in terms of investment style. Almost 56% of the fund is in small- and mid-cap stocks. I personally don’t think that’s enough of an incentive to invest, but that’s just my opinion.
The next possibility is an ETF covered in a previous article, the Consumer Discretionary Select SPDR (NYSEARCA:XLY), with a 3.30% weighting for News Corp. While Viacom isn’t in its top 10, it is in the 15th spot, with a 2.07% weighting. For several reasons, XLY is a much better ETF to own than PowerShares. It has 80 stocks, versus 30 for PowerShares; it’s invested in many different businesses and not just media; it has significantly higher trading volumes, providing better liquidity; its performance has been better over the long term and its net expense ratio is 0.20% — one-third of PowerShares’ net expense ratio.
If you must have Viacom in the top 10 holdings, your best alternative is a different PowerShares ETF, the Dynamic Leisure & Entertainment Portfolio (NYSEARCA:PEJ), with a 5.01% weighting. Its media concentration isn’t nearly as high, with just four media companies out of 30 holdings. News Corp. is not one of them. Unfortunately, like its sister fund, its net expense ratio is 0.60% — much too high for a passive investment.
The bottom line: ETFs make sense because they provide diversification. If you’re a media junkie, XLY gives you an investment in at least 14 media companies, including News Corp. and Viacom, while also providing investments in companies outside media. It’s a great compromise.
As of this writing, the auther did not own a position in any of the stocks named here.