ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | July 23, 2012 3:24 pm

The markets provided muted activity for the week of July 16-20, which is normal for the middle of summer. The S&P managed a gain of 0.4% despite serious concerns from investors about sovereign debt in Europe. On Friday, the index dropped 1% on those concerns, putting a damper on a reasonably positive week. As always, our contributors were busy coming up with investment ideas. Here are my ETF alternatives:

Technology stocks[1] were on Daniel Putnam’s mind Monday as he waded through the value bin looking for a few kernels of strength in a sector that’s been beaten down in recent weeks. Putnam believes IBM (NYSE:IBM[2]), Qualcomm (NASDAQ:QCOM[3]) and Cisco Systems (NASDAQ:CSCO[4]) present investors with real opportunity at current prices.

The ETF common to all three and containing the highest possible weightings for each is the Dow Jones U.S. Technology Sector Index Fund (NYSE:IYW[5]). Although Apple (NASDAQ:AAPL[6]) is the biggest holding by a wide margin at 24%, all three are top 10 holdings and represent a combined 17% weighting. The top 10 holdings are 70% of the 152-stock fund so any rebound in the tech sector would definitely be felt by its shareholders. At an annual expense ratio of 0.47%, it’s a reasonable substitute for Putnam’s three picks.

On Tuesday, Jeff Reeves was thinking big, recommending five stocks worth owning[7] that trade for more than $300 a share. As they say in investment 101: One share at $300 is the same as 10 at $30. Yet investors seem reticent to buy these high priced stocks — the origin of which probably dates back to pre-computer days when odd lots were difficult to obtain. The reality is there’s no reason to fear them.

Of Jeff’s five picks, my favorite would be Intuitive Surgical (NASDAQ:ISRG[8]), makers of the da Vinci surgical system that provides surgeons with increased precision during operations. It’s truly groundbreaking stuff and a big reason why its stock has averaged annual returns of 20% over the past five years.

If you don’t want to buy the stock, I’d go with the Dow Jones U.S. Medical Devices Index Fund (NYSE:IHI[9]), which holds 38 medical equipment companies including Intuitive at a 7% weighting. With a reasonable expense ratio of 0.47%, the fund provides some added diversification just in case Intuitive slips up, which is unlikely.

Midweek, Tom Taulli was also thinking technology, only this time the focus was on one specific stock: Intel (NASDAQ:INTC[10]), which possesses some interesting opportunities[11] in the cloud that should provide investors with an excellent combination of growth and income. Semiconductor stocks bore me to tears but I understand where he’s coming from on this pick — Intel’s solid.

If you’re like Tom and are honed in on Intel itself, I’d go with the Market Vectors Semiconductor ETF (NYSE:SMH[12]) where Intel is the number one holding at 20%.

If you like Intel but don’t want to be tied to semiconductors (or technology for that matter), a better bet is the PowerShares Buyback Achievers Portfolio (NYSE:PKW[13]), which has Intel as the second largest holding at almost 5%. The fund itself consists of 246 companies that have repurchased at least 5% of their stock in the last 12 months. If you believe in buybacks, this is the one.

Aaron Levitt was busy Thursday contemplating rising rental rates[14] for advanced drilling rigs. In particular, Levitt is impressed by Noble (NYSE:NE[15]), which boasts Bob Douglas ultra-deepwater drilling vessels that rent for $618,000 a day. Imagine how many videos you could rent with that kind of money! And long as the U.S. is committed to providing its own energy, companies like Noble are going to benefit from drilling in the Gulf of Mexico.

Your choices here are limited so I’d go with the Market Vectors Oil Services ETF (NYSE:OIH[16]), which also holds Transocean (NYSE:RIG[17]) and some of its other peers. With just 26 stocks and the top 10 accounting for almost 70% of the portfolio, it’s a very concentrated fund and not for everyone.

Ending the week on a positive note, Jim Woods highlighted 15 companies who announced dividend increases[18] in their quarterly earnings reports. The companies ran the gamut from jam producer J.M. Smucker Co. (NYSE:SJM[19]) to Education Realty Trust (NYSE:EDR[20]), a REIT focused on college housing.

There were some big increases but of all 15, the one that most caught my attention was Stanley Black & Decker (NYSE:SWK[21]), who increased its dividend 20% to $0.49 a share and announced a share repurchase program to buy up to 20 million shares. With a yield of 3.1%, the power tools company provides an excellent combination of income and growth.

I’m surprised at how few ETFs have the iconic brands in their top 10 holdings. Therefore, your best bet is the Morningstar Mid Value Index Fund (NYSE:JKI[22]), which has Stanley as the third largest holding at 1.21%. With 197 holdings and a good cross section of sectors, its diversification is more than satisfactory. Most importantly, its 30-day SEC yield is 2.27%, which is only five basis points lower than the Vanguard Dividend Appreciation ETF (NYSE:VIG[23]).

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

  1. Technology stocks:
  2. IBM:
  3. QCOM:
  4. CSCO:
  5. IYW:
  6. AAPL:
  7. five stocks worth owning:
  8. ISRG:
  9. IHI:
  10. INTC:
  11. interesting opportunities:
  12. SMH:
  13. PKW:
  14. rising rental rates:
  15. NE:
  16. OIH:
  17. RIG:
  18. dividend increases:
  19. SJM:
  20. EDR:
  21. SWK:
  22. JKI:
  23. VIG:

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