Snatch Up Small Caps: ETF Alternatives for Hot Stock Picks

by Will Ashworth | June 17, 2013 5:09 pm

The markets last week continued to digest the Federal Reserve’s rumored plan to purchase $10 billion to $20 billion less per month in Treasury bonds, and didn’t like it — the S&P 500 lost 1% last week, its third weekly decline out the last four.

Where do the markets go from here? While the answer obviously is an unknown, InvestorPlace contributors had lots of stock ideas for readers over the past week. Here are my ETF alternatives for those recommendations:


Assistant Editor Marc Bastow gets things rolling June 11 with his endorsement of Walmart (WMT[1]) as a legacy stock[2]. Bastow sees the Bentonville behemoth as a great long-term investment not because of its size but because of its ability to adapt and change on the fly. For example, it’s converting 1,000 of its locations to solar power by 2020. With full-year revenues of $447 billion — more than double Costco (COST[3]) and four other peers — it stands to reward shareholders very nicely in the next decade through stock buybacks and dividends. It’s hard to argue with Marc’s logic.

The obvious choice here is to go with a retail-oriented fund like the Market Vectors Retail ETF (RTH[4]), which has Walmart as its largest holding at a weighting of 10.43%. However, Bastow’s recommendation was more a nod to the company itself rather than retail en masse. Therefore, I’m going to suggest the PowerShares Dividend Achievers Portfolio (PFM[5]) instead. Walmart is one of the ETF’s top 10 holdings at 4.99% — an important piece of this 210-holding large-cap value fund. Stocks eligible for the fund must have increased their dividend payout in each of the past 10 years. Investors interested in income will want to own it.

Jacobs Engineering

Even though I’m Canadian, I love the idea of “Made in America.” The U.S. is slowly rebuilding its manufacturing base[6], and Traders Reserve had four recommendations June 13 that are all benefiting from the industrial build-out that’s currently underway in America. Of the four, its favorite pick is Jacobs Engineering (JEC[7]), which it considers to be undervalued by 18% compared to its peers. With more than 100 projects on the go, its future looks extremely rosy.

Although it has had a good run over the past year, I believe the PowerShares Dynamic Building & Construction Portfolio (PKB[8]) has further room to run. With a small group of 30 stocks and both JEC and Fluor (FLR[9]) in the top 10, the commercial builders are well-represented. Although PKB is not cheap at an expense ratio of 0.63%, it provides a good cross-section of businesses currently benefiting from the economic rebound. Owning PKB allows you to ride the manufacturing resurgence while also playing the housing recovery.


Gannett’s (GCI[10]) purchase of Belo Corp. (BLC[11]) makes GCI the fourth-largest owner of network affiliate television stations[12] in the country. Furthermore, broadcasting will soon generate two-thirds of its operating income. CEO Gracia Martore wants Gannett to become a more diversified multimedia company. The combination of the Belo acquisition with the continuing turnaround at USA TODAY makes Gannett an extremely attractive media stock. But given everything in media seems to be up in the air these days, an ETF alternative that spreads the risk is in order.

This next pick will have readers wondering if I’m being paid by Invesco (IVZ[13]) to mention its ETFs. I can assure you that’s not the case — sometimes, a certain company just has the right fits. Concerning Gannett, the best alternative is the PowerShares Dynamic Media Portfolio (PBS[14]), a group of 30 U.S. media companies whose top 10 holdings includes both Belo and Gannett, as well as Disney (DIS[15]) and CBS (CBS[16]). This equal-weight fund reconstitutes and rebalances the 30 stocks every quarter. Because PBS is a highly focused fund, I would recommend investors only buy it if they are comfortable owning media stocks.

Small-Cap E&P Stocks

Last week, InvestorPlace emphasized small-cap stocks[17]. Aaron Levitt recommended three small caps, including the PowerShares S&P SmallCap Energy Portfolio (PSCE[18]). Aaron made the argument that smaller exploration and production companies[19] can mean more for your portfolio’s performance than big boys like Exxon Mobil (XOM[20]) or Total (TOT[21]). In addition to the ETF, Levitt recommended Oasis Petroleum (OAS[22]) and Bill Barrett Corp. (BBG[23]). While the ETF gives you small-cap E&P diversification, it doesn’t own either of his stock picks, so I’ll provide an alternative to PSCE.

Sticking with exploration and production, I’m going to go with the equal-weighted SPDR S&P OIL & Gas Exploration & Production ETF (XOP[24]), which holds both OAS and BBG along with 67 other stocks, including XOM. The average market cap is $20 billion compared to $1.6 billion for the small-cap ETF. At 0.35%, its expense ratio is almost half that of PSCE. While you’re probably sacrificing on the upside, the XOP gives you both of Aaron’s recommendations along with some very large companies that will get you through any rough patches the oil business might experience.

Medical Properties Trust

Finishing off this week’s alternatives, I’ve got four small-cap picks[25] from four different contributors, including Hilary Kramer, Louis Navellier, Tom Taulli and Jeff Reeves. Operating in four different industries, it’s difficult to know which of the four picks makes the most sense. However, I believe that Medical Properties Trust (MPW[26]), which Louis Navellier calls his favorite small-cap stock, is the best bet of the four. A REIT that invests in healthcare facilities, MPW is doing a good job growing revenues and earnings. Add to that the fact it’s investing in an industry that’s only going to get bigger as boomers age, it’s a winning combination.

The ETF alternative to take advantage of MPW is the IQ US Real Estate Small Cap ETF (ROOF[27]), which seeks to invest in small-cap U.S. real estate companies. With a total of 51 holdings — including MPW in the No. 4 position with a weighting of 3.68% — it’s an excellent fund to own if you believe in the power of REITs. Approximately 29% of the portfolio is invested in mortgage REITs, with office REITs the next-biggest holdings at 18.1% and specialized REITs (including MPW) in the No. 3 spot at 13.8% of the portfolio. While its expense ratio isn’t cheap at 0.69%, it’s a good complement to large-cap real estate ETFs.

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

  1. WMT:
  2. legacy stock:
  3. COST:
  4. RTH:
  5. PFM:
  6. rebuilding its manufacturing base:
  7. JEC:
  8. PKB:
  9. FLR:
  10. GCI:
  11. BLC:
  12. fourth-largest owner of network affiliate television stations:
  13. IVZ:
  14. PBS:
  15. DIS:
  16. CBS:
  17. small-cap stocks:
  18. PSCE:
  19. smaller exploration and production companies:
  20. XOM:
  21. TOT:
  22. OAS:
  23. BBG:
  24. XOP:
  25. four small-cap picks:
  26. MPW:
  27. ROOF:

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