ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | February 27, 2012 10:40 am

Until Warren Buffett sent his annual letter to shareholders Saturday, the highlight for stocks last week was the S&P 500 hitting its highest level since June 2008. In an otherwise slow week, investors had something to talk about. Here at, several stocks were on the minds of our writers. In my weekly roundup, I’ll look at some ETF alternatives.

Beginning the week, crime was on Lawrence Meyers’ mind. On Feb. 20, he pointed out[1] that Corrections Corporation of America (NYSE:CXW[2]), the largest private prison company in the nation, is really a real estate business that happens to also run prisons. Hedge fund manager Bill Ackman owned a big position in CXW until the middle of 2011, when he moved into J.C. Penney (NYSE:JCP[3]), likely because of the hiring of Ron Johnson, Apple‘s (NASDAQ:AAPL[4]) former head of retail, around the same time.

Investors who like what they see at Corrections Corporation of America might consider two exchange-traded funds in its place. The first is First Trust’s Industrials/Producer Durables AlphaDEX Fund (NYSE:FXR[5]), which takes the top stocks from the Russell 1000 index that exhibit both growth and value factors. Corrections Corporation of America has a 0.99% weighting and is one of 103 stocks in the portfolio. With an expense ratio of 0.70% and an annual turnover of more than 100%, the fund is expensive to own and not very tax efficient.

A second idea is the Rydex S&P MidCap 400 Equal Weight ETF (NYSE:EWMD[6]), which unlike the quant fund earlier, has 400 equal-weighted stocks that are rebalanced quarterly and reconstituted annually. Although Corrections Corporation of America’s weighting is only 0.24%, its expense ratio is 43% cheaper at 0.40%. Long-term I like the Rydex fund because equal-weighted funds tend to do better than cap-weighted funds and quant funds are simply too complicated for average investors.

On Feb. 21, Tom Taulli was talking up[7] Groupon‘s (NASDAQ:GRPN[8]) acquisition strategy. The daily-deal site raised $700 million in its December IPO and is busily spending some of that stash in an effort to improve its technology relative to LinkedIn (NYSE:LNKD[9]) and others. I’ve never been a fan of Groupon’s business model, but those who are will likely be interested in the Global X Social Media Index ETF (NASDAQ:SOCL[10]), which invests in all the big names in social media, including Groupon at 3% of the portfolio.

I had previously recommended SOCL on Feb. 13 [11]as a good alternative to Zynga (NASDAQ:ZNGA[12]), which accounts for 4.49% of the fund. For social media, it’s the only game in town. editor Jeff Reeves was on Boston’s WRKO AM 680 on Feb. 22, extolling the virtues of Caterpillar (NYSE:CAT[13]), suggesting that the maker of construction and mining equipment is a good long-term play[14] based on its business in emerging markets and an economy that continues to recover. Back in November I picked[15] Joy Global (NYSE:JOY[16]) over Caterpillar as the better stock to own. After the way Caterpillar manhandled its Electro-Motive employees in London, Ontario, I’m confident I made the right choice despite short-term results indicating otherwise.

However, if you must own this labor despot, a better alternative would be to buy the Industrial Select Sector SPDR Fund (NYSE:XLI[17]), which gives you ownership of some of this country’s biggest industrial companies, including Caterpillar at 5.67% of the portfolio. The fund has almost $4 billion in assets, its expense ratio is cheap at 0.18% and it has provided good long-term performance. Eventually, all stocks revert to the mean, and Caterpillar is due.

Kellogg‘s (NYSE:K[18]) recent acquisition of Pringles from Procter & Gamble (NYSE:PG[19]) for $2.7 billion made Jeff Reeves take notice on Feb. 23[20]. It turns out P&G had a Plan B if its original deal with Diamond Foods (NASDAQ:DMND[21]) fell apart, which it did.

Kellogg suddenly finds itself in second place in the snack-food business. I like Kellogg as a stock, but you have to wonder about the integration process given the quality-control issues the food giant has faced in the past couple of years.

Consumer-staples stocks have done well in recent years. A good defensive position that also gives you a piece of Kellogg would be to buy the Consumer Staples Select SPDR Fund (NYSE:XLP[22]), which has an annual expense ratio of 0.18%. It has 44 holdings, including the maker of Special K at 1.25% of the portfolio. Long term, you won’t find many funds more predictable.

Jim Woods wrapped up the week on Feb. 24[23] talking about 24 companies that increased their quarterly dividends. The rise that most caught my attention was that of Herbalife (NYSE:HLF[24]), which bumped its dividend by 50%, to $0.30 quarterly. With share repurchases outweighing dividend payments by 300% in the past three years, this was a good opportunity to provide shareholders with a more tangible reward.

Despite the increase, HLF’s yield is still below 2%. Consumer Staples Select is the obvious choice, but it doesn’t hold Herbalife. Instead, go for the Vanguard Consumer Staples ETF (NYSE:VDC[25]), which has a small HLF weighting (less than 1%), but an SEC yield of 2.69%, giving you better income and diversification.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

  1. On Feb. 20, he pointed out:
  2. CXW:
  3. JCP:
  4. AAPL:
  5. FXR:
  6. EWMD:
  7. On Feb. 21, Tom Taulli was talking up:
  8. GRPN:
  9. LNKD:
  10. SOCL:
  11. I had previously recommended SOCL on Feb. 13 :
  12. ZNGA:
  13. CAT:
  14. suggesting that the maker of construction and mining equipment is a good long-term play:
  15. Back in November I picked:
  16. JOY:
  17. XLI:
  18. K:
  19. PG:
  20. made Jeff Reeves take notice on Feb. 23:
  21. DMND:
  22. XLP:
  23. Jim Woods wrapped up the week on Feb. 24:
  24. HLF:
  25. VDC:

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