ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | November 5, 2012 1:01 pm

The week of Oct. 29-Nov. 3 was record-setting, but not in a good way. Hurricane Sandy forced financial markets to close for two consecutive days, something that hadn’t happened because of weather since 1888. The S&P 500 closed up 0.2% on the shortened week and would have done even better if not for the almost 1% drop on Friday, despite positive U.S. job numbers[1].

While it was a wild week affecting people and businesses up and down the East Coast, InvestorPlace contributors were still able to put out some stock recommendations. Here are the ETF alternatives.

Jim Woods[2] started off last week by reminding investors that Black Tuesday happened exactly 83 years earlier on October 29, 1929, plunging 12% on that fateful day. Woods provides investors with five companies that not only survived the depression[3] but have been paying yearly dividends ever since.

The ETF alternative here — The PowerShares Dividend Achievers Portfolio (NYSE:PFM[4]) — is a no-brainer. All five of the companies Woods recommends are held in the fund, three of them with weightings of 4.5% or more. PFM seeks to replicate the performance of the Dividend Achievers Index. For those unfamiliar with this index, its constituents have all increased their annual dividend for at least 10 consecutive years.

Comprising 200 stocks, the ETF managed to deliver an annualized aftertax return of 2.97% since its inception in September 2005. If preservation of capital is important to you, it lost just 29% in 2008 compared to 37% for the S&P 500 and 36% for large-cap blend funds. It’s a little expensive at 0.60%, but PFM gets the job done.

Halloween came midweek this year, and Aaron Levitt[5]‘s treat for investors was informing them about an IRS ruling[6] that would allow income generated from the processing of natural gas liquids (NGLs) into olefins to qualify for master limited partnerships. Companies like Williams (NYSE:WMB[7]) are now able to pass the assets used in the production of these olefins into Williams Partners (NYSE:WPZ[8]), its master limited partnership, increasing the MLP’s distributable cash.

Levitt suggests roughly 80% of those distributions are tax-deferred until the sale of the MLP units, making them very attractive to income investors. Given this ruling, you can expect to see chemical MLPs become available in the near future. In the meantime, your best is the Global X MLP ETF (NYSE:MLPA[9]), which invests in 30 MLPs, including Williams Partners at a weighting of 4.92%. Most important, its 30-day SEC yield is 6.67%, and its expense ratio is 0.45%, nearly half the MLP ETF average of 0.84%.

Also happening on Halloween was Walt Disney’s (NYSE:DIS[10]) announcement that it was acquiring Lucasfilm from George Lucas[11] for $4 billion including $2 billion cash and 40 million shares of the entertainment conglomerate. Most people know Lucasfilm for Star Wars, and although George Lucas won’t be joining Disney, it’s clear that Disney is buying the film studio to get its hands on the most valuable movie franchise in history.

The very next day Traders Reserve[12] said it would own Disney stock solely on the basis of its Lucasfilm acquisition. That’s a pretty strong endorsement, and while I agree that the acquisition is a slam-dunk for Disney, a lot can still go wrong in the entertainment business.

To protect yourself against this possibility, I’d buy the Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY[13]), which owns 82 consumer discretionary stocks including Disney at 6.27%, the third-largest holding. It’s dirt cheap at 0.18%, it gives you significant exposure to Disney and it has delivered a 10-year total return of 7.91%, 117 basis points higher than the S&P 500.

With Hurricane Sandy’s cleanup underway, many including Jon Markman[14] are suggesting that stocks related to the rebuilding[15] will benefit greatly in the next month similar to what happened after Katrina. Whether it’s Home Depot (NYSE:HD[16]), Eagle Materials (NYSE:EXP[17]) or one of the many other companies that provide materials for home improvement, renovation or in this case, rebuilding, they’ll definitely see an unexpected surge in demand for their products.

With the housing recovery already gaining some steam, the Sandy cleanup provides an additional boost to these businesses. Markman makes a further recommendation of homebuilders like Lennar (NYSE:LEN[18]) and Pulte Group (NYSE:PHM[19]), which could see increased demand for their inventory in the New York-New Jersey area.

Your least expensive way to play this is the SPDR S&P Homebuilders ETF (NYSE:XHB[20]), which has a couple of homebuilders in the top 10 and lots of other interesting businesses among its 35 holdings. At 0.35%, it provides investors with a reasonably priced option to benefit from the building and construction that’s going to take place in the next several months.

Closing out the week Lawrence Meyers[21] had an interesting article about preferred shares[22], something regular investors generally avoid. Meyers’ most important point about buying preferred shares is to avoid issues that are callable in the near future. That’s because if they’re trading over par, you’ll lose some of your appreciation if the shares are recalled.

Meyers gave us five possibilities, including Ashford Hospitality (NYSE:AHT[23]) and Public Storage (NYSE:PSA[24]). Rather than worry about which ones to pick, let the pros do it for you. The iShares S&P U.S. Preferred Stock Index Fund (NYSE:PFF[25]) owns 294 preferred share issues, including all five Meyers recommended. With a 30-day SEC yield of 5.84% and one of the lowest expense ratios of the eight preferred share ETFs available at 0.48%, it’s an excellent way to generate additional income.

As of this writing, Will Ashworth didn’t own any of the stocks mentioned here.

  1. positive U.S. job numbers:
  2. Jim Woods:
  3. five companies that not only survived the depression:
  4. PFM:
  5. Aaron Levitt:
  6. IRS ruling:
  7. WMB:
  8. WPZ:
  9. MLPA:
  10. DIS:
  11. acquiring Lucasfilm from George Lucas:
  12. Traders Reserve:
  13. XLY:
  14. Jon Markman:
  15. stocks related to the rebuilding:
  16. HD:
  17. EXP:
  18. LEN:
  19. PHM:
  20. XHB:
  21. Lawrence Meyers:
  22. preferred shares:
  23. AHT:
  24. PSA:
  25. PFF:

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