ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | May 21, 2012 9:52 am

The week of May 14-18 saw a gradual decline[1], with the S&P 500 dropping 4.3% in five days of trading, culminating in Facebook’s (NASDAQ:FB[2]) underwhelming IPO on Friday.

Depending on how you view the markets currently, you’re either petrified or licking your chops hoping for even more pessimism so you can get an better deal on stocks. Despite the carnage, several InvestorPlace contributors made stock recommendations last week. Here are my ETF alternatives for those picks.

Starting off the week, Nancy Zambell recommended two stocks[3]. First up is American Capital (NASDAQ:ACAS[4]), the Maryland-based private equity firm. Nancy believes an improving economy means that ACAS will have more opportunities to finance middle-market businesses that are looking to grow.

I worked for one of American Capital’s past investments, and that situation ended badly, leaving me with a bad taste in my mouth about private equity in general. But for those who agree with Zambell that private equity is a good place to be right now, I suggest the PowerShares Global Listed Private Equity Portfolio (NYSE:PSP[5]), which has an annual expense ratio of 0.60% after fee waivers and expense assumptions by the advisor.

There are a total of 65 holdings in the ETF, including American Capital, which is a top 10 holding, weighted at 3.94%. The number one holding is Onex Corporation (TORONTO:OCX[6]), a well run private equity firm located in my hometown of Toronto.

On Tuesday, InvestorPlace staff were talking about the National Association of Homebuilders[7] report that found that builders of single-family homes in May were as confident as they’ve been since May 2007.

While the home-building business is still nowhere near normal, investors are starting to peck away at some of the stocks, including Ryland Group (NYSE:RYL[8]) and D.R. Horton (NYSE:DHI[9]). ETFs were made for situations like this, where you have a gut feeling about a particular industry or sector but aren’t sure who the winners will be.

If you’re convinced homebuilder stocks are going to dominate on the upside in the coming months, I’d say go with the iShares Dow Jones U.S. Home Construction Index Fund  (NYSE:ITB[10]), which has seven homebuilders in the top 10, with an expense ratio of 0.47%.

If you’re lukewarm about the sector, however, it’s better to own the PowerShares Dynamic Building & Construction Portfolio (NYSE:PKB[11]), which has just three homebuilders, charges 0.63% annually and owns other home-related stocks, such as Tractor Supply (NASDAQ:TSCO[12]) and Mohawk Industries (NYSE:MHK[13]). I like its composition a lot more than I do the iShares fund, but again it all depends on your desire to bet on homebuilders.

Midweek, Tom Taulli discussed the pros and cons[14] of investing in General Motors (NYSE:GM[15]). After making three arguments for both sides, Taulli came down on the side of growth, suggesting that Warren Buffett’s purchase of 10 million shares is an indication that the stock is cheap.

It’s interesting that the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ[16]) doesn’t own GM in its top 10 holdings, and the other car fund, the Global X Auto ETF (NYSE:VROM[17]), has a weighting of just 2.98%. With both funds charging annual expense fees of 0.65% or more, I’d suggest the First Trust US IPO Index Fund (NYSE:FPX[18]), which charges 0.60% annually, has excellent sector diversification and GM is weighted at 6.75%. I’m generally not a fan of IPOs, but Morningstar gives the fund a four-star rating over five years, and looking at its performance, I can’t argue with that assessment.

Lawrence Meyers checked into hotel REITs on Thursday. He believes the present lodging cycle[19] is about three years through a 10-year cycle, and while hotel cycles closely correlate with GDP, the fact remains that hotel demand is outstripping supply, keeping prices relatively high and generating strong revenue per available room.

Although Meyers recommends a number of stocks, I’m going to chicken out once more and recommend an ETF that spreads the love around a little bit, investing in all kinds of REITs, including those that own hotels. The Vanguard REIT ETF (NYSE:VNQ[20]) holds 111 stocks, including Host Hotels & Resorts (NYSE:HST[21]), the 10th-largest holding in the fund. VNQ charges a rock-bottom 0.12% and currently has a yield above 3%. It has a relative strength index of 28.9 as of May 18, meaning it’s oversold from a technical standpoint.

Jim Woods closed out the week discussing 16 companies that are increasing their dividends[22]. Of these, the 50% bump at HollyFrontier (NYSE:HFC[23]), to $0.15 a share, along with a special dividend of $0.50 a share, tells me the oil refiner is generating plenty of cash and trades dirt cheap at a forward P-E of 7.1.

Oil refiners in general are cheap right now, so the best call is to buy the PowerShares Dynamic Energy Exploration & Production Portfolio (NYSE:PXE[24]), which owns most of the major refiners, including HollyFrontier, as well as the big explorer/producers such as ExxonMobil (NYSE:XOM[25]).

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

  1. gradual decline:
  2. FB:
  3. recommended two stocks:
  4. ACAS:
  5. PSP:
  6. OCX:
  7. National Association of Homebuilders:
  8. RYL:
  9. DHI:
  10. ITB:
  11. PKB:
  12. TSCO:
  13. MHK:
  14. pros and cons:
  15. GM:
  16. CARZ:
  17. VROM:
  18. FPX:
  19. the present lodging cycle:
  20. VNQ:
  21. HST:
  22. 16 companies that are increasing their dividends:
  23. HFC:
  24. PXE:
  25. XOM:

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