ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | December 17, 2012 11:27 am

The fiscal cliff held stocks in check for another week as the S&P 500 fractionally listed lower. Not even Ben Bernanke’s announcement that the Fed would keep interest rates low[1] until the unemployment rate falls below 6.5% or inflation rises above 2.5% could get investors to bite. Nonetheless, InvestorPlace contributors had several stock suggestions to get us through the muck — suggestions that could be used to position yourself into equally attractive exchange-traded funds.

3D Systems

InvestorPlace Assistant Editor Mark Bastow recommended 3D Systems (NYSE:DDD[2]) on Dec. 12. It’s a really cool company that I’d never heard of until now — and it’s rare when I’m unaware of an NYSE-traded stock.

I won’t even begin to explain how this 3D printing technology[3] works, but its products are definitely not your garden-variety printers. This one has me fascinated. The problem many individual stock buyers will have with 3D Systems’ shares, however, are their 700% gain in the past three years, as well as its nosebleed 70 price-to-earnings ratio.

An alternate solution is to buy the PowerShares S&P SmallCap Information Technology Portfolio (NASDAQ:PSCT[4]), a group of 126 information technology stocks plucked from the S&P SmallCap 600 that favors growth over value by a 5-to-1 ratio. 3D Systems is the third-largest holding at 2.43%. At an annual expense ratio of 0.29%, PSCT provides you with far less company risk while still owning a piece of a really cool company.


Richard Band, editor of Profitable Investing, made a good argument Dec. 13 about why master limited partnerships are the place to be[5] in 2013. Given MLPs cost the Treasury just $1 billion a year in lost revenue and are responsible for so much of the country’s oil exploration and development, Band reasons that Congress will leave them alone, making MLPs one of the few places that income investors can go for decent returns.

Always concerned about fees, my suggestion is to go with the Global X MLP ETF (NYSE:MLPA[6]), which charges an annual expense ratio of 0.45% — nearly half the MLP ETF average of 0.84%. Composed of 30 MLPs designed to replicate the performance of the U.S. MLP asset class, its 30-day SEC yield of 6.14% should keep income investors happy. The only caveat: It has been in existence for less than a year[7]. If you’re one who subscribes to the theory that only the big ETF marketers will survive, this might not be for you.

Spectra Energy

Energy independence[8] is a popular subject these days, and nowhere is that more evident than in the midstream business, whose pipelines and storage systems are vital to any hope of achieving it. InvestorPlace contributor Aaron Levitt believes pipelines should be an important part of your portfolio. Some of his recommendations include MLPs like Williams Partners LP (NYSE:WPZ[9]), whose stock prices have been knocked down as a result of the potential increase in dividend taxes — even though MLP distributions aren’t qualified dividends in the first place. He also recommends Spectra Energy (NYSE:SE[10]), whose acquisition of a major oil pipeline in Western Canada and the U.S. gives it diversification beyond its natural gas background.

The fund I’d go with to capture Spectra is the iShares MSCI Select Socially Responsible ETF (NYSE:KLD[11]), whose 139-stock portfolio screens for positive environmental, social and governance characteristics. Spectra is a top-10 holding, and KLD costs 0.5% in fees — not bad considering the extra screening.

Joy Global

Lately I’ve been reading that natural gas prices continue to make a comeback as power generation moves away from coal[12]. One company that generates a significant amount of revenue from the coal industry is Joy Global (NYSE:JOY[13]), a manufacturer of large machinery used to mine those minerals.

Both JOY and rival Caterpillar (NYSE:CAT[14]) are affected by commodity prices. Nonetheless, Lawrence Meyers sees Joy Global’s future as bright and its stock undervalued. The ETF with the largest position in Joy is the Van Eck Market Vectors Coal ETF (NYSE:KOL[15]) with a weighting of 6.75%. Unless you really like the coal business, though, this probably is the wrong way to use an ETF.

Instead, I’d go with the Guggenheim S&P 500 Equal Weight Industrials ETF (NYSE:RGI[16]), which has Joy at a weighting of 1.65% — only 29 basis points less than the No. 1 holding. Even better is the fact that its annual expense ratio of 0.5% is 9 basis points less than KOL. To me, it’s the more sensible play.

Dollar Stores

My last ETF alternative is for Dollar General (NYSE:DG[17]), a stock recently added to the S&P 500. InvestorPlace contributor Ethan Roberts believes the fiscal cliff uncertainty has put a cloud over all the dollar-store stocks[18], though long-term they’ll all do well as consumers continue to frequent them in search of savings.

Although Dollar General is good, Roberts believes Dollar Tree (NASDAQ:DLTR[19]) is the better pick long-term because of its commitment to selling everything under $1. While admirable, Canada’s Dollarama (PINK:DLMAF[20]) moved beyond $1 when it realized it wouldn’t be able to sustain that price point in the long run. So, the question is which ETF makes the most sense in this situation.

The solution: The Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSE:RCD[21]), which has 82 stocks including Dollar General, Dollar Tree and Family Dollar Stores (NYSE:FDO[22]). It might not appreciate 578% over three years as Dollar Tree did between 2009 and 2012, but it will deliver solid performance over the long haul.

You can have your cake and invest in it, too.

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

  1. would keep interest rates low:
  2. DDD:
  3. 3D printing technology:
  4. PSCT:
  5. master limited partnerships are the place to be:
  6. MLPA:
  7. It has been in existence for less than a year:
  8. Energy independence:
  9. WPZ:
  10. SE:
  11. KLD:
  12. power generation moves away from coal:
  13. JOY:
  14. CAT:
  15. KOL:
  16. RGI:
  17. DG:
  18. dollar-store stocks:
  19. DLTR:
  20. DLMAF:
  21. RCD:
  22. FDO:

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