ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | February 11, 2013 1:40 pm

It was another ho-hum week on the markets as the S&P 500 eked out a 0.31% gain from Feb. 4-8. The index is now up 6.64% year-to-date so far in 2013. The big news last week was Michael Dell’s $24.4 billion offer to buy his company and take it private. Some shareholders aren’t too happy about that, so stay tuned. As always, InvestorPlace contributors were busy coming up with stock ideas for readers. Here are my ETF alternatives for their picks from last week.

My first ETF alternative comes from contributor Michael Shulman[1]‘s Feb. 4 article that recommends a couple of option trades[2] for General Motors (NYSE:GM[3]) — one that’s aggressive and a second more conservative play. Schulman is a believer in GM. Investors interested in either of his option trades should be, too, because you will have to risk some capital. Despite GM taking bailout money, I think it’s done a great job turning around its business. Although CEO Dan Akerson doesn’t get nearly as much positive press as Ford‘s (NYSE:F[4]) Alan Mulally, he’s done an admirable job in the C-suite.

In terms of ETF alternatives, you have really only two choices: You can purchase an ETF that has a significant weighting in GM like the First Trust US Index Fund (NYSE:FPX[5]) at 7.4%, or you could buy the Advent/Claymore Enhanced Growth & Income Fund (NYSE:LCM[6]), which holds GM (top 10 holding) at a weighting of 1.78%.

Advent is actually a closed-end fund that mostly invests in convertible securities, equities and high-yield securities. The fund resembles Shulman’s ideas in that it writes covered call options on the securities it owns to generate additional premium income. It’s a stretch to suggest it’s doing something similar to what Shulman proposes, but it does involve options.

Of the two funds, I’d definitely go with the ETF because the annual expense ratio is much cheaper at 0.60% compared with 1.82% for the closed-end fund. In addition, the closed-end fund uses leverage, making it far more volatile.

On Feb. 5, InvestorPlace Editor Jeff Reeves[7] made compelling arguments[8] why investors should consider buying American International Group (NYSE:AIG[9]), Wells Fargo (NYSE:WFC[10]) or Banco Santander (NYSE:SAN[11]). Bruce Berkowitz loves AIG, and Warren Buffett’s a big fan of Wells Fargo. As for Banco Santander, it’s recent write-downs bring some closure to its bad debt problems. Given that global powerhouse’s very big dividend yield of 9.1%, Reeves is confident it can ride out the problems in Europe.

To capture all three stocks, your best bet is the iShares Global Financials ETF (NYSE:IXG[12]), which invests in 218 of the world’s biggest financial companies. Wells Fargo and Banco Santander are in the top 10 holdings, with weightings of 3.10% and 1.56%, respectively, while AIG comes in at 1.05%. In addition to banks and insurance companies, it also has some investment companies including BlackRock (NYSE:BLK[13]), iShare’s parent. At 0.48%, you’re getting global coverage of the financial sector. That’s not a lot to pay for a sector that looks ripe for further gains in 2013 and beyond.

Johnson Research Group[14] homed in on healthcare stocks[15] Feb. 7. That group has been red hot, up more than 8% in 2013. Although it picked three stocks worth considering — Becton-Dickinson (NYSE:BDX[16]), Boston Scientific (NYSE:BSX[17]) and Tenet Healthcare (NYSE:THC[18]) — it also put in a good word for the Health Care Select Sector SPDR (NYSE:XLV[19]) as a way to participate in sector’s momentum. While I think the healthcare sector is good place to be right now, Boston Scientific is a stock that has gotten ahead of itself[20].

The XLV is great for capturing U.S. companies in the sector, but I’m going to provide an alternative. Consider the iShares Global Healthcare ETF (NYSE:IXJ[21]), which invests in 87 global healthcare stocks and charges only 0.48% annually. Sure, it’s not 0.18% like the XLV, but the XLV doesn’t go all over the world.

Having said that, the names in the IXJ top 10 aren’t too dissimilar to those in the XLV. The big difference is that the IXJ invests 77% of its assets in pharmaceutical companies compared to 47% for the XLV. The fund holds all three of Johnson Research Group’s recommendations, although in very small quantities. If you believe in Big Pharma, this is a better fund than the XLV.

Contributor Hilary Kramer[22], editor of GameChangers, spent more than a cursory examination of unmanned aerial vehicles (UAVs) on Feb. 7. It turns out her husband is a cop, and as a result, she’s interested in defense stocks[23]. Anything that can put those who serve and protect out of harm’s way is a good thing in her opinion. I couldn’t agree more.

Kramer’s three favorite defense stocks include a manufacturer of UAVs, a company that secures communications and a software business that provides network protection against security threats. One’s a micro-cap, another is a small-cap and the third is on the verge of becoming a large cap.

Right up front, let me tell you that there’s no way that I can find to own all three stocks in a single ETF. The Vanguard Total Stock Market ETF (NYSE:VTI[24]) captures two of them. From there you’re stuck with combining defense funds with software funds.

Therefore, in the spirit of Kramer’s article, I’d suggest that you buy the iShares U.S. Aerospace & Defense ETF (NYSE:ITA[25]), which invests in 34 companies in the sector including Aerovironment (NASDAQ:AVAV[26]), the maker of drones I referenced above. With an expense ratio of 0.46%, ITA isn’t the cheapest fund  available, but it’s also not the most expensive. If you want to invest in defense, this is a good bet.

Contributor Lawrence Meyers[27]‘ analysis of United Rentals (NYSE:URI[28]), which rents construction equipment[29] to contractors and other people in need of such products, leads to our final ETF alternative. Meyers highlighted the good and bad about the recently merged company on Feb. 7. The big elephant in the room for United Rentals is its debt. It has $6.7 billion of the stuff after its merger with RSC Equipment Rental, giving it has little room for error.

Nonetheless, the business model is tried and true. I remember Wayne Huizenga saying in the heyday of Blockbuster how he loved the business because you could buy a tape and have it paid for in four or five rentals. The rest was pure profit. United’s business doesn’t quite work the same way, but you get the idea.

The best ETF alternative to United Rental’s stock is an ETF I’ve not had the pleasure to recommend before. It’s the PowerShares DWA Technical Leaders Portfolio (NYSE:PDP[30]), a collection of 100 holdings that is selected from 3,000 of the largest U.S.-listed companies using relative strength analysis to determine the best companies to invest in. United Rental’s weighting is 0.91%, about average for the ETF. With 10 sectors represented, PDP is very diversified. Although expensive at 0.67%, it has met or exceeded the S&P 500 in recent years. It’s worth a look for sure.

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

  1. Michael Shulman:
  2. a couple of option trades:
  3. GM:
  4. F:
  5. FPX:
  6. LCM:
  7. Editor Jeff Reeves:
  8. compelling arguments:
  9. AIG:
  10. WFC:
  11. SAN:
  12. IXG:
  13. BLK:
  14. Johnson Research Group:
  15. healthcare stocks:
  16. BDX:
  17. BSX:
  18. THC:
  19. XLV:
  20. gotten ahead of itself:
  21. IXJ:
  22. Hilary Kramer:
  23. defense stocks:
  24. VTI:
  25. ITA:
  26. AVAV:
  27. Lawrence Meyers:
  28. URI:
  29. rents construction equipment:
  30. PDP:

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