ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | June 4, 2012 5:08 pm

The S&P 500 lost about 3% for the week of May 28-June 1, finishing Friday trading up just 1.6% year-to-date. Europe and a deteriorating jobs market gave investors plenty of incentive to exit positions last week. Despite the negative news, InvestorPlace contributors were busy making buy recommendations. As always, I provide alternatives for those stock picks.

The beginning of last week had Richard Band suggesting that the summer swoon could be the start of a powerful recovery[1] late in the year. Emphasizing stocks that pay a dividend, Band believes investors should focus their attention on solid businesses trading at the middle of their 52-week price range or below. Three stocks on his buy list include Chevron (NYSE:CVX[2]), McDonald’s (NYSE:MCD[3]) and Emerson Electric (NYSE:EMR[4]).

The best bet in this situation is an easy choice — Vanguard Dividend Appreciation Fund (NYSE:VIG[5]) — because all three stocks are in the top 20 holdings. VIG replicates the performance of the Dividend Achievers Select Index, which comprises NYSE and Nasdaq stocks that have increased dividends in each of the past 10 or more years. With an annual expense ratio of 0.13% and an SEC yield of 2.18%, it achieves everything a dividend investor is looking for at an extremely reasonable cost.

On Tuesday, Jeff Reeves recommended against owning Facebook (NASDAQ:FB[6]) stock for at least six months because its 90- and 180-day lock-ups will unleash 1.7 billion shares into the market, many of which are owned by insiders rushing for the exits[7]. Thus, the downward pressure on the stock is expected to be enormous. I agree 100% with his theory.

However, if you must take a gamble that it won’t fall much lower than $26, your best and only bet is to buy the Global X Social Media Index ETF (NASDAQ:SOCL[8]), which has Facebook at a weighting of 7.95% — its third-largest holding out of 29 stocks.

I wouldn’t own this ETF, but that doesn’t mean you shouldn’t.

Midweek, Charles Sizemore was busy touting utilities as his favorite sector of the summer[9]. A contrarian viewpoint for sure; Sizemore likes the fact the 3.9% dividend paid by the Select Sector Utilities SPDR (NYSE:XLU[10]) is double the S&P 500. Citing the top holdings of Southern Company (NYSE:SO[11]) and Duke Energy (NYSE:DUK[12]), Sizemore reckons this type of ETF makes sense for income investors unable to find stable income from bonds and CDs. With an expense ratio of 0.18%, you can’t do much better in terms of fees.

Ultimately, I don’t know if the utilities sector is going to outperform in the months ahead, but I do know it provides an excellent stream of income, and on that note, Sizemore strikes a chord.

Dan Burrows was talking yield on Thursday as the 10-year Treasury note hit an all-time low[13]. At 1.65%, the 10-year Treasury pays less than 278 of the 500 stocks in the S&P 500. According to Bob Doll, chief equity strategist of BlackRock (NYSE:BLK[14]): “… stocks have become quite cheap relative to bonds.”

Reaching for my own contrarian play, I’m going to recommend the SPDR S&P International Dividend ETF (NYSE:DWX[15]), which has a 30-day SEC yield of 8.54%. With Europe representing 55% of the 126 holdings, it’s not for the faint of heart. However, it sits at a 52-week low and represents a buying opportunity not seen since early 2009.

Closing out the week June 1, Tom Taulli highlighted the reasons why lock-ups can hurt the price of an IPO stock[16] immediately after their expiration. Citing Groupon (NASDAQ:GRPN[17]), LinkedIn (NYSE:LNKD[18]) and Zynga (NASDAQ:ZNGA[19]) as examples where the stock plummeted as a result of insider selling. Clearly there has to be a better way — and there is.

The First Trust US IPO Index Fund (NYSE:FPX[20]) provides investors with a semi-passive index approach that avoids the original lock-up periods, preferring to invest in the top 100 IPOs based on performance and liquidity. Therefore, you’re not going to see many newly minted IPOs. In fact, Phillip Morris International (NYSE:PM[21]), which went public more than four years ago, is its biggest holding at 10.47%. You’re getting quality companies without the lock-up hiccups that invariably hit most new offerings. Since its inception in April 2006, it has outperformed the Russell 3000 by 404 basis points annually.

Groupon and the rest of them might be constituents someday, but that will be long after their lock-ups have expired.

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

  1. powerful recovery:
  2. CVX:
  3. MCD:
  4. EMR:
  5. VIG:
  6. FB:
  7. insiders rushing for the exits:
  8. SOCL:
  9. favorite sector of the summer:
  10. XLU:
  11. SO:
  12. DUK:
  13. 10-year Treasury note hit an all-time low:
  14. BLK:
  15. DWX:
  16. lock-ups can hurt the price of an IPO stock:
  17. GRPN:
  18. LNKD:
  19. ZNGA:
  20. FPX:
  21. PM:

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