Double-Dipping in Retail: ETF Alternatives for Hot Stock Picks

The S&P 500 closed out the week of July 8-12 up 2.96%. It’s up 17.81% year-to-date. With bank earnings looking very healthy, the markets appear ready to move higher over the remaining 5½ of the year. The index could challenge its 2009 total return of 26.5%.

InvestorPlace contributors were busy recommending stocks to ride this wave — here are my ETF alternatives.

Louis Navellier, editor of Blue Chip Growth, was hot for biotech July 8. Two companies in particular: Aegerion Pharmaceuticals (AEGR) and Ligand Pharmaceuticals (LGND). The former has a drug that treats a rare disease costing an individual patient $300,000 annually. Approved for use in the U.S. and soon in Europe, Navellier likes its fundamentals. The latter biotech makes money by licensing drugs to Big Pharma. It has partnerships with many of the biggies including GlaxoSmithKline (GSK). I would consider both stocks to be speculative in nature given their lack of earnings.

The ETF alternative in this situation is crystal-clear: Go with the SPDR S&P Biotech ETF (XBI), a group of 56 biotech stocks. The stocks are equal-weighted with a minimum market cap of $400 million, and the ETF rebalances four times per year. Aegerion’s current weighting is 2.1% while Ligand weighs in at 0.82%. At an expense ratio of 0.35%, this is a much better way to play the biotechnology industry. In the past 52 weeks Aegerion gained 427%. While you might not have gotten the same boost owning the ETF rather than Aegerion directly, you would still have benefited without nearly the same risk. Don’t be a hero … unless you can afford to lose 100% of your investment.

While the conversation continues across North America about the wisdom of crude-by-rail, Aaron Levitt suggested July 9 that the Lac-Megantic disaster wouldn’t slow the shipment of crude oil over the railroads. In fact, the big companies are seriously increasing the number of carloads shipped. For this reason Aaron believes Canadian National (CNI) and other railway stocks make sense, especially if the Lac-Megantic disaster hurts their stock prices.

The easiest way to play railroads is to buy the iShares Transportation Average ETF (IYT), a group of 21 transportation-related stocks including Union Pacific (UNP), the fund’s largest holding at a weighting of 13.42%. There are four railroads held in the portfolio with a total weighting of 31.09%, the biggest industry by a significant amount. In addition, if you think the economy is coming around, this is an excellent way to play the momentum. At an expense ratio of 0.45%, you’re paying a reasonable fee for a good bet on the transportation sector.

Speaking of transportation, Jim Woods wondered July 10 what’s next for Tesla (TSLA), which is up 300% in the past 12 months. That’s a very good question. While it’s now making a profit, its future success is by no means written in stone. Of the three scenarios Woods lays out, the most likely is that it continues to grow earnings and by extension, its stock price. I couldn’t agree more. I’ve liked Elon Musk’s vision for the company for some time. Tesla’s executing its plan flawlessly.

But again, Tesla’s success isn’t written in stone. For this reason you can go with the First Trust Nasdaq Clean Edge Green Energy (QCLN), which I recommended back in June. That’s the play if you’re sure about Tesla but want to provide yourself with a little diversification. If you’re less sure about Tesla’s success, you might consider the First Trust Nasdaq Global Auto Index Fund (CARZ), which focuses on all the big car companies and has Tesla weighted at 3.22% and Ford in the No. 1 spot at 8.36%.

This morning I woke up to the news Canada’s largest grocery store (Loblaw Companies (LBLCF)) was acquiring Canada’s largest drug store (Shoppers Drug Mart (SHDMF)) for $11.9 billion in cash and stock. It seems everyone loves the drug store business. Last week, Susan Aluise compared America’s two largest chains — Walgreens (WAG) and CVS Caremark (CVS) — wondering which was the better buy. Her final verdict? CVS was the better buy because of its pharmacy benefit management business. Almost too close to call, it probably could have gone either way.

Once again the ETF alternative is a straightforward affair. The Market Vectors Retail ETF (RTH) owns both, at weightings of 5.16% for CVS and 4.48% for WAG. Consisting of 25 U.S. retailers including Walmart (WMT) in the No. 1 position, it’s the best way to capture both stocks while still gaining access to some of the country’s best retail outfits. At 0.35%, you’re getting an extremely focused fund that’s performed very well since its inception in 2011.

Finishing out the week, Lawrence Meyers had some stocks in mind that he’d like to buy once quantitative easing comes to an end. Meyers figures that investors will rotate out of stocks and back into bonds, sending many quality names down based on a shift in capital allocation (rather than something fundamental). Two of the companies on Meyers’ shopping list are Costco (COST) and Whole Foods Market (WFM), which happen to be two of my favorites as well. Coincidentally, the Market Vectors Retail ETF also holds Costco at 5.02% and Whole Foods at 3.77% in addition to WAG and CVS, allowing you to kill two birds with one stone.

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


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