ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | July 30, 2012 1:27 pm

The week of July 23-27 was a good one for stocks as the Federal Reserve appeared ready to introduce more quantitative easing to help the economy keep moving forward. Plus, European Central Bank head Mario Draghi vowed to keep the eurozone intact, while Germany expressed new willingness to support the euro. Despite earnings reports that were so-so[1], the S&P 500 ended the week up 1.7%, with most of the gains coming on Friday. Here are my ETF alternatives to InvestorPlace writers’ stock picks from the past week.

InvestorPlace Editor Jeff Reeves[2] started the week off thinking big — big dividend yields[3] that is. He reasoned that if you were willing to assume risk, you’d be more than happy with the 7.8% yield provided by New York Community Bancorp (NYSE:NYB[4]). That’s some dividend.

However, the payout ratio of 90% means any future decline in earnings would likely result in a cut in the dividend. Sustainability is definitely a question mark.

Your ETF alternative — PowerShares KBW High Dividend Yield Financial Portfolio (NYSE:KBWD[5]) in this instance — is a slam dunk. New York Community Bancorp is the fund’s 15th-largest holding out of 36 with a weighting of 3.02% and a 30-day SEC yield of 9.02%. In addition to banks and insurance companies, the fund invests in business development companies and real estate investment trusts. If you want yield, this is a more diversified route.

On Tuesday, contributor Lawrence Meyers[6] was making a case for buying eBay (NASDAQ:EBAY[7]), whose PayPal division processed $34 billion in transactions[8] in the second quarter, posing a real threat to both Visa (NYSE:V[9]) and Mastercard (NYSE:MA[10]).

While I wouldn’t go that far just yet — I use Visa almost exclusively because I get better transaction reporting than with my bank’s debit card — its point-of-sale partnerships could tip the balance in its favor. I can definitely see where he’s coming from. It’s a solid recommendation.

But rather than go with the technology fund that has the highest eBay weighting, I’m going to recommend an ETF alternative that you can own as a core holding. The PowerShares Morningstar StockInvestor Core Portfolio (NYSE:PYH[11]) is a 46-stock portfolio that is reconstituted and rebalanced monthly, has a net expense ratio of 0.53% and invests in high-quality companies selected by Morningstar. eBay’s weighting is 3.7%, making it the fifth-largest holding. Fans of Warren Buffett will like it also because Berkshire Hathaway (NYSE:BRK.B[12]) is the No. 1 holding at 5.48%. It’s a very interesting group of stocks.

At midweek, Caterpillar (NYSE:CAT[13]) announced unexpectedly strong second-quarter earnings[14] despite the fact the global economy seems to be coming to a complete stop. The Illinois company expects to deliver record earnings in 2012, yet its stock is down 10% year-to-date as investors assume the worst.

InvestorPlace feature writer Dan Burrows[15] believes its stock is a screaming buy in the low $80s. While I personally detest the way it treats its employees (plant closings amid record profits), the stock does appear cheap. I think your best option here is to buy the SPDR Dow Jones Industrial Average ETF (NYSE:DIA[16]), which replicates the performance of the Dow Jones Industrial Average, of which Caterpillar is a part. It’s cheap at 0.18%, provides a 30-day SEC yield of 2.44% and provides enough diversification just in case the economy does revisit 2008.

InvestorPlace‘s IPO maven Tom Taulli[17] was busy Thursday congratulating Jon Markman for picking Hershey (NYSE:HSY[18]) as one of the site’s 10 Best Stocks for 2012[19]. Up 15% year-to-date, the chocolate company has been able to continue expanding revenues and profits through regular price increases. The most recent 10% increase did affect volume but not enough to slow it down.

Given Hershey’s 43% of the North American market, Taulli is right to suggest its stability as a company justifies its premium valuation[20]. This is one company whose stock I’d want to own. However, since we’re looking for ETF alternatives, I’ll recommend the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS[21]), where Hershey is the 14th-largest holding at 2.53%. I haven’t picked an equal-weight fund in a while, but I like them a lot because they avoid the overweighting that occurs with popular stocks[22] like Apple (NASDAQ:AAPL[23]), etc. It’s hard to go wrong with consumer staples.

Ending the week, Portfolio Grader[24] provided readers with not just one stock recommendation[25] but six. If pharmaceutical stocks are your thing, its recommendations included a strong buy for Eli Lilly (NYSE:LLY[26]). For this ETF alternative, I’m going be boring and go with the Market Vectors Pharmaceutical ETF (NYSE:PPH[27]), which seeks to replicate the performance of 25 of the largest U.S.-listed publicly traded pharmaceutical companies. While it doesn’t give you two of the six stocks recommended by Portfolio Grader, it does give you a concentrated portfolio. It’s as good a proxy as you’ll find.

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

  1. earnings reports that were so-so:
  2. InvestorPlace Editor Jeff Reeves:
  3. dividend yields:
  4. NYB:
  5. KBWD:
  6. contributor Lawrence Meyers:
  7. EBAY:
  8. $34 billion in transactions:
  9. V:
  10. MA:
  11. PYH:
  12. BRK.B:
  13. CAT:
  14. unexpectedly strong second-quarter earnings:
  15. Dan Burrows:
  16. DIA:
  17. IPO maven Tom Taulli:
  18. HSY:
  19. 10 Best Stocks for 2012:
  20. justifies its premium valuation:
  21. RHS:
  22. overweighting that occurs with popular stocks:
  23. AAPL:
  24. Portfolio Grader:
  25. stock recommendation:
  26. LLY:
  27. PPH:

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