ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | February 21, 2012 12:04 pm

Looking back on the week of Feb. 13-17, there were a number of interesting stocks covered by InvestorPlace writers. I’m not interested in rehashing points already made but rather in providing readers with some ETF alternatives for those stocks. As always, a prime benefit of investing in ETFs is that they give you diversification while still letting you invest in some of your favorite companies. Investing doesn’t have to be a zero-sum game.

Early in the week, Kyle Woodley was in a feisty mood, recommending that investors avoid denim brands[1] Guess (NYSE:GES[2]), True Religion Brand Jeans (NASDAQ:TRLG[3]) and Joe’s Jeans (NASDAQ:JOEZ[4]) because they aren’t good long-term investments.

I disagree with Kyle, especially when it comes to True Religion. They’re in the midst of transitioning from wholesaler to retailer, putting their margins in flux as they spend on store openings and the infrastructure to support that change while shrinking revenues and profits from the wholesale business. That paints a picture of inconsistency that is irrelevant to the future. With $200 million in the bank, TRLG has plenty of cash to carry out its transition. This is definitely a case of taking one step back to go two steps forward.

For those who agree with me, might I suggest the PowerShares Dynamic Consumer Discretionary Sector Portfolio (NYSE:PEZ[5]), which has 60 holdings, including True Religion at a weighting of 0.93%. Top holdings include Ford (NYSE:F[6]) and Limited Brands (NYSE:LTD[7]). At a net expense ratio of 0.65%, it’s a little expensive.

A cheaper alternative is the Vanguard Consumer Discretionary ETF (NYSE:ETF[8]), which charges 0.19% annually, replicates the performance of the MSCI US Investable Market Consumer Discretionary 25/50 Index and is made up of 370 stocks, including both True Religion and Guess. The “25” in the index limits any one stock to 25% of overall assets, and the “50” means those holdings with a 5% weighting can’t represent more than 50% of the assets, providing significant diversification. Despite the extra stocks, the Vanguard fund’s three-year return through Feb. 17 has averaged 37% annually, 946 basis points higher than the PowerShares fund.

On Feb. 14, options strategist Frederic Ruffy noted[9] that Liberty Media‘s (NASDAQ:LBTYA[10]) Liberty Global holdings had had a bullish day in the previous day’s trading, with 2,059 calls changing hands — 86 times its recent average daily volume. News stories about Poland’s phone company, Telekomunikacja Polska SA, buying into the pay TV partnership of TVN SA, Canal Plus and Liberty Global could had been the spark, but I’m not an options expert.

For those who like what Liberty Global’s doing in Europe and elsewhere, an alternative is the Global X NASDAQ 400 Mid Cap ETF (NASDAQ:QQQM[11]), which replicates the performance of the 400 mid-cap non-financial stocks on the Nasdaq after the Nasdaq 100. Just formed in December 2011, QQQM doesn’t have a track record. Its annual expense ratio is 0.48%, making it relatively expensive versus other mid-cap funds, such as the iShares Russell Midcap Index Fund (NYSE:IWR[12]), which charges 0.21% — or less than half. The downside is the weighting for Liberty Global, at just 0.33% in the iShares ETF compared to 0.78% for the Global X fund. Despite the smaller weighting, I’d still go for the iShares fund, which has been around since July 2001.

On Feb. 15, Brad Moon discussed original content [13]at Netflix (NASDAQ:NFLX[14]). I’ve never been a fan of the company[15], but maybe he’s on to something. Perhaps Netflix will morph into a streaming-only television network. Whatever the future, if you believe Netflix has a bright one, perhaps you can hedge your bet with an ETF. The first possibility is the First Trust ISE Cloud Computing Index Fund (NASDAQ:SKYY[16]), which focuses on pure play and non-pure-play cloud-computing companies. There are 39 stocks in the fund, with Netflix the second-largest holding, at 5.12% of the portfolio. Only Oracle (NASDAQ:ORCL[17]) is higher, at 5.74%.

SKYY is also less than a year old, providing little in the way of long-term performance. The index itself, however, has existed since December 31, 2007, and its performance has been quite strong — up 276% from February 17, 2009, to February 17, 2012. With a high annual expense ratio of 0.60%, you might want to consider a second possibility, which is the Rydex S&P 500 Pure Growth ETF (NYSE:RPG[18]). Netflix is the No. 1 holding, at 1.92% of assets, the fund has an annual expense ratio of 0.35% and its pure-growth style seems to have served it well.

On Feb. 16, Tom Taulli debated the pros and cons[19] of Kellogg (NYSE:K[20]), the unexpected beneficiary of the collapsed deal between Diamond Foods (NASDAQ:DMND[21]) and Procter & Gamble (NYSE:PG[22]). Paying $2.7 billion for Pringles, this vaults Kellogg into the second spot in snacks, behind PepsiCo (NYSE:PEP[23]).

Kellogg is a winner, in my opinion. The best ETF to take advantage of this game-changing deal is the PowerShares S&P 500 High Quality Portfolio (NYSE:PIV[24]), with 134 holdings and an expense ratio of 0.52%. Kellogg is not a top 10 holding, but it’s close, at 1.18% of net assets. In addition to the Kellogg exposure, you get the most stable growth companies in the S&P 500. What’s not to like?

Finally, Jeff Reeves ended the week recapping how well the 10 Best Stocks for 2012 were doing[25] year-to-date. Up 17%, compared to 8% for the S&P 500, investors are likely scrambling to own stocks such as Mako Surgical (NASDAQ:MAKO[26]). You could buy all 10 stocks, or you could buy the Vanguard Total Stock Market ETF (NYSE:VTI[27]). It won’t get you the same short-term performance, but with an annual expense ratio of just 0.07%, long-term, you’ll do just fine.

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

  1. recommending that investors avoid denim brands:
  2. GES:
  3. TRLG:
  4. JOEZ:
  5. PEZ:
  6. F:
  7. LTD:
  8. ETF:
  9. options strategist Frederic Ruffy noted:
  10. LBTYA:
  11. QQQM:
  12. IWR:
  13. Brad Moon discussed original content :
  14. NFLX:
  15. I’ve never been a fan of the company:
  16. SKYY:
  17. ORCL:
  18. RPG:
  19. Tom Taulli debated the pros and cons:
  20. K:
  21. DMND:
  22. PG:
  23. PEP:
  24. PIV:
  25. recapping how well the 10 Best Stocks for 2012 were doing:
  26. MAKO:
  27. VTI:

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