ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | September 17, 2012 1:11 pm

Are stocks getting too prosperous? Infinity stimulus[1] sent the markets through the roof last week, with the S&P 500 jumping almost 2% to finish at 1,465.77 — 6.4% below its all-time high reached on Oct. 9, 2007.

With the markets up about 20% year-to-date, it seems almost everything InvestorPlace contributors recommend turns to gold these days. But for those wanting to hedge some of those picks in something a little more diversified, here are five interesting ETF alternatives from the week of Sept. 10-14:

Under Armour

Starting out last week, Tom Taulli analyzed the pros and cons[2] of owning Under Armour (NYSE:UA[3]). Taulli believes the athletic apparel and footwear company is an American success story whose brand power is second only to Nike (NYSE:NKE[4]) in the sporting goods realm. However, despite all the good things to say about Under Armour, Taulli feels its P/E is a just too pricey and investors should wait till it cools down.

You can do that … or you can buy the Guggenheim S&P MidCap 400 Pure Growth ETF (NYSE:RFG[5]), which holds 100 mid-cap growth stocks, including Under Armour at 2.01%. In addition to Under Armour in its top 10, it has positions in Carter’s (NYSE:CRI[6]) and NewMarket Corp. (NYSE:NEU[7]), two companies I follow very closely.

With $540.6 million in net assets, RFG is reasonably liquid, and its 0.35% expense ratio is attractive. Most importantly, mid caps tend to outperform small caps and large caps[8] over the long haul.


On Wednesday, Aaron Levitt made a cogent argument[9] why Transocean’s (NYSE:RIG[10]) focus on deepwater drilling will pay big dividends for the company soon enough. Transocean’s stock is down 50% since the Deepwater Rig explosion in 2010 as ongoing litigation and liability concerns keeps its stock on a short leash.

I too believe Transocean’s stock is a good buy at current prices. Once the litigation is settled and the shackles come off, its stock will naturally rise. However, ultra-deepwater drilling is not without risk. Oil services companies like Transocean do fantastic when exploration and production companies are drilling new wells. However, they do miserably when E&P companies aren’t. It’s as cyclical as they come.

The ETF alternative I’d recommend is the Market Vectors Oil Services ETF (NYSE:OIH[11]), which exposes you to some of the industry’s biggest and best companies. Transocean is a top-10 holding at 4.55% of the 25-stock portfolio. At 0.35%, its expense ratio is reasonable. The only caveat: OIH should be considered a small specialty holding and not a core part of your portfolio.

Pier 1 Imports

On Thursday, InvestorPlace Editorial Assistant Alyssa Oursler was praising the turnaround[12] of home-furnishings retailer Pier 1 Imports (NYSE:PIR[13]), suggesting that its comeback is still under way. Pier 1’s stock is up 72% in the past year, but Oursler feels it has a lot more gas in the tank. PIR’s second-quarter net income jumped 36% on strong sales, yet its stock barely budged.

A company by the name of Greek Investments has been accumulating Pier 1’s stock since 2009, and it currently is PIR’s largest investor, owning 11.26%. If you buy the stock, you’d do well to keep an eye on Greek Investments’ ownership position.

For those not so sure, your best bet is to buy the SPDR S&P Homebuilders ETF (NYSE:XHB[14]), which has a 3.32% weighting in Pier 1. I like this fund because it’s a backdoor way to own PIR while also benefiting from the recent momentum homebuilders are experiencing. If you look at the entire portfolio, you’ll see that there are some great companies other than homebuilders, including Williams-Sonoma (NYSE:WSM[15]) and Tempur-Pedic (NYSE:TPX[16]).

Closed-End Funds

Also on Thursday, Lawrence Meyers spent some time discussing why investors should exit their bond investments and head to closed-end funds in search of yield. Meyers suggested three possibilities[17], with the most interesting being the NFJ Dividend, Interest & Premium Strategy Fund (NYSE:NFJ[18]).

Managed by Allianz Global Investors, NFJ currently trades at a 5% discount to its net asset value. Approximately 75% of the portfolio is invested in dividend-paying stocks, while the remaining 25% goes into income-producing convertible securities. Morningstar only gives NFJ a two-star rating in part because of its parent company. You’ll want to take a really close look before buying.

For those looking for an ETF alternative, go with the PowerShares CEF Income Composite Portfolio (NYSE:PCEF[19]), a fund-of-funds that invests in fixed-income securities and other high-yielding investments. The NFJ is one of the 124 holdings at 2.49%. Because PCEF invests in so many other funds, the actual expense ratio is estimated at 1.56%, which is extremely high. However, the SEC 30-day yield of 7.53% might help ease the pain.

Illinois Tool Works

For my final ETF alternative, I’ve chosen the Dividend Growth Investor’s Saturday recommendation of Illinois Tool Works (NYSE:ITW[20]), an industrial conglomerate that has been paying dividends since 1933[21], not to mention increasing them every year for the past 49 years — warranting a nod as one of InvestorPlace‘s Dependable Dividend Stocks[22].

In addition to paying a consistent and growing dividend, ITW also repurchases its own shares. Over the past decade, Illinois Tool Works has reduced its share count by 22% to 483 million. I’m not a fan of share repurchases[23], but those that are will most definitely appreciate ITW.

The SPDR S&P Dividend ETF (NYSE:SDY[24]) owns ITW at a weighting of 1.56%. Its 81 holdings seek to replicate the performance of the S&P High Yield Dividend Aristocrats Index. With a dividend yield of 3.02% and an expense ratio of 0.35%, SDY makes an excellent alternative to ITW.

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

  1. Infinity stimulus:
  2. pros and cons:
  3. UA:
  4. NKE:
  5. RFG:
  6. CRI:
  7. NEU:
  8. mid caps tend to outperform small caps and large caps:
  9. cogent argument:
  10. RIG:
  11. OIH:
  12. praising the turnaround:
  13. PIR:
  14. XHB:
  15. WSM:
  16. TPX:
  17. three possibilities:
  18. NFJ:
  19. PCEF:
  20. ITW:
  21. paying dividends since 1933:
  22. Dependable Dividend Stocks:
  23. I’m not a fan of share repurchases:
  24. SDY:

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