ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | November 26, 2012 12:31 pm

The combination of a shortened trading week and a possible resolution to the fiscal cliff seems to have been the tonic the S&P 500 was looking for. It closed up 3.6% last week, its best performance since June. Although InvestorPlace contributors enjoyed their share of turkey last week, they were able to come up with some stock recommendations in between holiday festivities. Here are my ETF alternatives.

Dollar stores[1] seem to be popping up everywhere. Just down the street from my apartment, Dollarama (PINK:DLMAF[2]), Canada’s largest dollar-store chain, is opening a new store. I live in a nice area of Toronto, and five years ago you wouldn’t have ever imagined something like this opening on the block. That’s why Ethan Roberts[3]‘ comments Nov. 19 about Dollar Tree’s (NASDAQ:DLTR[4]) superior business model[5] ring true. With its stock taking a hit after announcing lowered guidance Oct. 11, its price-earnings ratio is now lower than that of both Family Dollar Stores (NYSE:FDO[6]) and Dollar General (NYSE:DG[7]).

The best alternative in this case is the PowerShares Dynamic Consumer Discretionary Sector Portfolio (NYSE:PEZ[8]), which has Dollar Tree at a weighting of 2.16%. The largest of the fund’s 60 holdings is Home Depot (NYSE:HD[9]) at 2.83%. At an expense ratio of 0.65%, PEZ is definitely not cheap. However, its performance over the last five years has been better than the S&P 500. More important, 43% of its holdings are small-cap stocks. It’s a good ETF to own if consumer confidence keeps increasing.

InvestorPlace‘s IPO Playbook[10] editor Tom Taulli[11] discussed Yahoo‘s (NASDAQ:YHOO[12]) resurgent stock price[13] on Nov. 20, suggesting that although CEO Marissa Mayer’s first few months at the helm have been successful, the company has a number of land mines to navigate in the coming months.

Taulli’s best point: Reminding investors about Hewlett-Packard (NYSE:HPQ[14]), which CEO Meg Whitman can attest is not an easy tech turnaround. The successful revival of Yahoo is going to take years.

A better bet is to buy the PowerShares Nasdaq Internet Portfolio (NASDAQ:PNQI[15]), which seeks to replicate the performance of the Nasdaq Internet Index, a group of 69 holdings — including Yahoo at a weighting of 5.14%. While more volatile than the S&P 500, its performance is significantly higher. Interestingly, PNQI’s performance over the past three years through Nov. 23 is virtually identical to that of the PowerShares consumer discretionary ETF discussed above.

Killing two birds with one stone, InvestorPlace contributor Brad Moon[16] on Nov. 21 discussed how Google (NASDAQ:GOOG[17]) was talking with Dish Network (NASDAQ:DISH[18]) about creating a wireless service[19]. Moon believes Google wants to do this to control the mobile experience for its Android-using customers in a manner similar to the way Apple (NADDAQ:AAPL[20]) controls its user experience.

I much prefer the Google of today then the company it was four years ago. Owning Google’s stock seems like a very smart idea given its $45 billion in cash. The PNQI is also the fund to own in this instance. Google is the third-largest holding at 7.91%, 277 basis points higher than Yahoo, the sixth-largest position. Its expense ratio of 0.60% is a little higher than the average 0.53% for all technology equity ETFs.

Bryan Perry[21], editor of Cash Machine, recommended on Nov. 21 that InvestorPlace readers ride the positive housing data[22] that came out last week by investing in a mortgage real estate investment trust (mREIT) like Armour Residential REIT (NYSE:ARR[23]), which invests in both fixed-rate and floating-rate mortgages. Perry reasons that the REIT’s portfolio income will rise once interest rates rise. Paying a monthly dividend of 9 cents, ARR’s yield is a whopping 16%. However, its payout was 33% higher in 2011.

To reduce your company risk owning Armour directly, it’s a better call to buy the IQ US Real Estate Small Cap ETF (NYSE:ROOF[24]), a group of 41 holdings that gives investors additional exposure to real estate beyond large-caps. Mortgage REITs account for 27.7% of the fund’s portfolio. ROOF’s yield is 6.6% — not quite in Armour’s league but more than satisfactory with far less risk.

Lastly, Lawrence Meyers[25] explained on Nov. 24 why investors shouldn’t get their shorts in a knot over McDonald’s (NYSE:MCD[26]) recent same-store sales decline[27]. His most important point is that the Golden Arches is focusing on profit margins these days over volume. Sometimes sales are going to decline.

In a similar fashion to apparel stores, Meyers notes that it often makes sense to sell less of something with a 40% gross margin than more of something with a gross margin half that rate. CEO Don Thompson isn’t positioning McDonald’s for the next 12 months but rather the next 12 years.

Meyers is right: There’s nothing to worry about at McDonald’s. However, if you want to hedge your bets, pick up the Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY[28]). It has McDonald’s at a weighting of 6.1%. It’s very inexpensive with an expense ratio of 0.18%. And it tends to outperform the S&P 500 over the short and long term.

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

  1. Dollar stores:
  2. DLMAF:
  3. Ethan Roberts:
  4. DLTR:
  5. superior business model:
  6. FDO:
  7. DG:
  8. PEZ:
  9. HD:
  10. IPO Playbook:
  11. Tom Taulli:
  12. YHOO:
  13. resurgent stock price:
  14. HPQ:
  15. PNQI:
  16. Brad Moon:
  17. GOOG:
  18. DISH:
  19. wireless service:
  20. AAPL:
  21. Bryan Perry:
  22. positive housing data:
  23. ARR:
  24. ROOF:
  25. Lawrence Meyers:
  26. MCD:
  27. same-store sales decline:
  28. XLY:

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