ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | March 13, 2012 9:41 am

It’s time again to a review some of the stock picks made by InvestorPlace contributors during the week of March 5-9 and provide investors with ETF alternatives to those stocks.

Starting out last week, Louis Navellier was interested in steady stocks[1]  — those blue chips offering the most reliable returns. Navellier had five companies in mind: Alexion Pharmaceuticals (NASDAQ:ALXN[2]), AutoZone (NYSE:AZO[3]), Dollar General (NYSE:DG[4]), Dollar Tree (NASDAQ:DLTR[5]) and McDonald’s (NYSE:MCD[6]).

Turns out Navellier wasn’t just interested in steady, he also appears to have money-saving consumers in mind. With the exception of Alexion, all of them provide products at reasonable prices. With an economy still recovering, these companies are doing very well. The difficulty is finding a single ETF that owns all five stocks at reasonably sufficient weightings.

At the end of the day, the best way to get all five of these stocks without going to a total market ETF, is to buy something based on the Russell 1000 index. The winner there in my opinion is the Rydex Russell 1000 Equal Weight ETF (NYSE:EWRI[7]) at an annual expense ratio of 0.40%. With 977 stocks in the fund, it’s essentially an equal-weighted version of a large-cap fund. I’ll take an equal-weighted fund over a market-weighted one any day because you’re not getting stocks that are overextended.

On Tuesday, Tom Taulli was extolling the virtues of Qualcomm‘s (NASDAQ:QCOM[8]) revenue growth, thanks to Apple (NASDAQ:AAPL[9]), China and India. Trading at 23 times earnings, Taulli believes its stock is priced to move[10]. Those who aren’t so sure have many ways you can play this. A tech fund would be an obvious choice, but not necessarily the best one. Again going with an equal-weight fund, the Rydex S&P 500 Equal Weight ETF (NYSE:RSP[11]) gives you all the stocks in the S&P 500, only equal-weighted instead of market-cap-weighted. This means you get Apple at a 0.25% weighting instead of 4.08%, which helps if you believe Apple is due for a correction.

A second alternative would be WisdomTree’s Earnings 500 Fund (NYSE:EPS[12]), which is a fundamental fund based on the index using earnings strength as the determining factor in the portfolio composition. In the WisdomTree fund, Qualcomm’s weighting is 0.51% versus 0.21% with the Rydex fund. Apple, however, represents 3.77%, so it’s important to keep this in mind when making a decision.

Of the two, the WisdomTree’s fund has the cheaper expense ratio at 0.28%, 12 basis points lower than the Rydex fund. While I do believe Apple’s stock is due for a correction, the fundamental-weighted fund likely will do better long-term.

March 7 was hump day last week, and Lawrence Meyers was talking up Carter’s (NYSE:CRI[13]), the children’s clothing retailer that sells direct-to-consumer and wholesale through both its Carter’s and OshKosh brands. Despite cotton prices hitting it pretty hard, Carter’s will still manage to deliver $2.40 in earnings per share in 2011. Meyers considers it a tad pricey[14].

If you agree, a good ETF alternative is to buy the First Trust Small Cap Growth AlphaDEX Fund (NYSE:FYC[15]), which has Carter’s at a 1.04% weighting and a top 10 holding. A tad expensive at 0.70%, it uses fundamental rankings with both growth and value factors, but growth holds sway. If you like small-cap stocks, this is an interesting alternative. Long term, it should do better than the S&P 500.

Thursday, March 8, had Susan Aluise talking about General Electric (NYSE:GE[16]) and its much maligned CEO Jeff Immelt[17]. Aluise believes GE’s renewed business plan focusing on what it’s traditionally been good at, combined with a stock trading at the bargain price of $18.75, makes it an ideal turnaround investment.

I wouldn’t be so sure. Since Immelt has been the boss, GE stock has fallen 36% compared to a 30% gain for the Dow. GE could very well be permanently broken. However, if you want to place a bet, a wise alternative would be to buy the PowerShares Fundamental Pure Large Value Portfolio (NYSE:PXLV[18]), a group of 91 stocks that includes GE at 6% of the portfolio. It, too, got its start in 2011, has an annual expense ratio of 0.39% and a reasonable SEC 30-day yield of 2.38%. Once again, fundamentals, rather than market capitalization, rule the roost.

Closing out the week, Jonathan Berr took a look at five turnaround picks for 2012[19] he’d made in an article last December. The best performer so far in 2012 is Sears Holdings (NASDAQ:SHLD[20]), up 143.22% as of March 8. Sears, as Berr rightly suggests, is a total mess. In a March 8 article, I highlight some reasons why investors need to avoid this retail disaster[21]. Its stock is going down.

However, if you must own it, take my advice and buy the SPDR S&P Retail ETF (NYSE:XRT[22]) instead. With 97 holdings and an annual expense ratio of 0.35%, you get Sears as a top 10 holding, but also competent retailers like Cabela’s (NYSE:CAB)[23], Ascena Retail Group (NASDAQ:ASNA[24]) and Buckle (NYSE:BKE[25]).

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

  1. Louis Navellier was interested in steady stocks:
  2. ALXN:
  3. AZO:
  4. DG:
  5. DLTR:
  6. MCD:
  7. EWRI:
  8. QCOM:
  9. AAPL:
  10. its stock is priced to move:
  11. RSP:
  12. EPS:
  13. CRI:
  14. Meyers considers it a tad pricey:
  15. FYC:
  16. GE:
  17. much maligned CEO Jeff Immelt:
  18. PXLV:
  19. five turnaround picks for 2012:
  20. SHLD:
  21. investors need to avoid this retail disaster:
  22. XRT:
  23. CAB):
  24. ASNA:
  25. BKE:

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