ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | September 10, 2012 12:08 pm

Last week saw the markets roar back with good news on several fronts, including European Central Bank President Mario Draghi’s announcement that the ECB will buy government bonds[1] from eurozone countries unable to manage their debts. That and the news China was undertaking $157 billion in infrastructure projects[2] to keep its economy moving sent the S&P 500 up 2.2% on the week and 14.3% year-to-date.

With stocks continuing to rally, InvestorPlace contributors were hard at work looking for stock ideas. Here are some ETF alternatives for those picks:

Post-Labor Day Double

The first day of the week was Labor Day, so I’ll provide ETF alternatives for two picks from Tuesday, Sept. 4.

Genpact: The first pick is Genpact (NYSE:G[3]), the former General Electric (NYSE:GE[4]) subsidiary that was spun off in 2004 and went public in 2007. Genpact provides business processing management for companies worldwide. Bryan Perry, editor of Cash Machine, believes its recent special dividend of $2.24 a share combined with strong earnings growth makes its stock an attractive play[5]. In August, Mitt Romney’s old firm, Bain Capital, bought 30% of the company for $1 billion, putting a floor price on its stock. Given Genpact’s stock has chronically underperformed in its five years as a public company, a safer bet would be the SPDR S&P Software & Service ETF (NYSE:XSW[6]), which owns 143 companies, including Genpact at a weighting of 0.71%. At 0.35%, the fund is a relatively inexpensive way to capture a growing part of the technology sector.

Hershey: The second of two picks on Tuesday is The Hershey Co. (NYSE:HSY[7]), one of the most iconic brands[8] in America. Jon Markman, editor of Trader’s Advantage, made Hershey’s his stock pick for InvestorPlace‘s Ten Best Stocks for 2012[9] contest. Year-to-date, HSY stock is up 17% on the strength of its international business, which now accounts for 15% of its business and is growing rapidly in China, India and Latin America. Hershey’s market share in the U.S. is tops at 43%, significantly higher than its nearest rival, Mars, at 31%. Hershey’s a great stock to own long-term. However, an equally attractive alternative is to buy the PowerShares Dynamic Food & Beverage Portfolio (NYSE:PBJ[10]), a collection of 30 stocks including Hershey at 4.96%, the fifth-largest holding. You get a little of everything in this fund, including restaurants, grocery stores, beverage companies and producers of packaged goods. It’s not cheap, with an expense ratio of 0.63%, but it has performed well over the long-term and makes a good defensive position should the economy get any worse.

Dollar General

At midweek, InvestorPlace Assistant Editor Marc Bastow was gushing over Dollar General‘s (NYSE:DG[11]) second-quarter earnings in comparison with the rest of the discount segment. Bastow makes the argument that Dollar General’s focus on consumables[12], which are about 73% of revenue compared to about 50% for its peers, keeps its customers returning in this difficult economy. Discount stores have had a pretty strong run the past few years, so I’d be leery of putting too much emphasis on them.

However, the First Trust Consumer Discretionary AlphaDEX Fund (NYSE:FXD[13]) gives you an interest in Dollar General, Dollar Tree (NASDAQ:DLTR[14]) and Family Dollar (NYSE:FDO[15]), while still owning other top-flight names like Wal-Mart (NYSE:WMT[16]) and Costco (NASDAQ:COST[17]). The holdings are selected using both growth and value factors making for a good blend. Mind you, at 0.7%, it’s not the cheapest fund available.

Restaurant & Resort Stocks

On Thursday, Louis Navellier’s Portfolio Grader recommended eight restaurant and resort stocks[18]. All were either a “buy” or a “strong buy.”

Earlier, I recommended the PBJ. Now, I’m going to suggest its sister fund — PowerShares Dynamic Leisure and Entertainment Portfolio (NYSE:PEJ[19]) — which invests in restaurants, resorts and other consumer discretionary stocks. Also with 30 holdings, it owns three Portfolio Grader picks: Jack in the Box (NASDAQ:JACK[20]), Cheesecake Factory (NASDAQ:CAKE[21]) and Brinker International (NYSE:EAT[22]). In comparison to the S&P 500, its performance during the past five years is substantially higher. It’s another defensive pick in my estimation.

Alternative Investments

Finishing the week, Richard Band, editor for Profitable Investing, recommended three interesting investments[23]. Of the group, I thought his views on Blackstone Group’s (NYSE:BX[24]) non-public business development company — FS Energy & Power Fund — were most compelling. With a 6% monthly cash yield and the opportunity for capital gains, investors not afraid of the lack of liquidity might want to have a look.

For those who value liquidity, an alternative solution is to buy the UBS E-TRACS Wells Fargo Business Development Company ETN (NYSE:BDCS[25]). It invests in 28 business development companies, all of which are publicly traded. While its expense ratio is high at 0.85%, its current 12-month yield is 7.16% — higher than Blackstone’s BDC, while also providing liquidity. I’m not a big fan of exchange-traded notes, but I do like BDCs, so if you can put up with the volatility, the income is nice to have.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

  1. ECB will buy government bonds:
  2. China was undertaking $157 billion in infrastructure projects:
  3. G:
  4. GE:
  5. an attractive play:
  6. XSW:
  7. HSY:
  8. iconic brands:
  9. Ten Best Stocks for 2012:
  10. PBJ:
  11. DG:
  12. focus on consumables:
  13. FXD:
  14. DLTR:
  15. FDO:
  16. WMT:
  17. COST:
  18. recommended eight restaurant and resort stocks:
  19. PEJ:
  20. JACK:
  21. CAKE:
  22. EAT:
  23. three interesting investments:
  24. BX:
  25. BDCS:

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