Use ETFs to Stuff Yourself Full of Blue Chips

by Will Ashworth | October 15, 2013 8:14 am

Stocks took flight this past Wednesday when it became apparent a deal to avoid the federal government defaulting on its debt was possible. Two-percentage-point jumps in the S&P 500 don’t happen too often, even in these frothy markets.

So, it appears at least some investors still are willing to buy. As a result, InvestorPlace contributors were busy making stock recommendations last week, though I think harnessing those picks via exchange-traded funds might be a better solution.


Conglomerates are some of the most interesting investments you can own. Often misunderstood, they seem to come into and out of fashion quite frequently. I provided readers with three interesting recommendations[1] Oct. 7, of which Loews Corp. (L[2]) is the most recognizable. Value investors at heart, the Tisch family will sit on the sidelines until an interesting proposition comes along. It has been awhile since the company has made a big splash.

Buying an ETF alternative is a good way to wait for that ship to come in. I’ve always preferred equal-weight ETFs to market cap funds, so I’m going to recommend the Guggenheim S&P 500 Equal Weight Financial ETF (RYF[3]), a collection of 81 financial stocks from the S&P 500. With an expense ratio slightly above average at 0.5%, or $50 annually for every $10,000 invested, the fund has returned 15.1% annually over the past five years, which is very acceptable. Loews’ current weighting in RYF is 1.26%.

Exxon Mobil

Aaron Levitt says to head south of the Rio Grande if you’re looking to score in the oil business. Mexico is reopening its oil fields to foreign producers, and the potential is tremendous. Levitt recommends five stocks[4] that stand a good chance of benefiting from the changing political environment south of the border. Topping the list is Exxon Mobil (XOM[5]), whose quest for new oil reserves is never-ending. Mexico would be a nice addition, keeping it at the top of the oil industry.

The big negative when it comes to equal-weight funds, according to its detractors, is that they are unnecessarily expensive when compared to market cap-weighted ETFs. In the case of energy, the Guggenheim S&P 500 Equal Weight Energy ETF (RYE[6]) has an expense ratio of 0.5% compared to 0.18% for the Energy SPDR Fund (XLE[7]). Both funds hold the same three stocks: Exxon, Schlumberger (SLB[8]) and Noble Corp. (NE[9]). Of course, the XLE has them with a combined weighting of 23.59% compared to 6.91% for the RYE.

If you think Exxon’s the play, then you go with XLE. If, on the other hand, you like Noble’s chances, you go with RYE. Either way you’re covered.


Looking for growth at a reasonable price? Dan Burrows has three recommendations[10] of companies whose profits are accelerating while their stocks are selling for bargain-basement prices. Of the three, I like Manitowoc (MTW[11]) the best. MTW has beaten the S&P 500 by 15 percentage points over the past year. For those unfamiliar with Manitowoc, it makes cranes and commercial foodservice equipment — a strange combination which probably contributes to some of the stock’s volatility. It has been mediocre in recent years, but as Dan suggests, it’s cheap and growing.

The best ETF to capture Manitowoc is the PowerShares Dynamic Building & Construction Portfolio (PKB[12]), which invests in 30 companies involved in building and construction in the U.S. Manitowoc is weighted at 2.43%. With home construction doing better, it’s a good way to ride the momentum and play Manitowoc at the same time. Just be aware that PKB’s expense ratio is moderately high at 0.63%.


I must admit I have a hard time arguing with anything Jonathan Berr had to say Oct. 10 in support of owning Costco (COST[13]). There are retailers … and then there’s Costco[14]. Its business model is so simple, and yet no one seems to be able to duplicate it. Yes, its earnings weren’t stellar this past quarter, but whose were? Same-store sales increased 5%, 380 basis points higher than Target (TGT[15]), whom I consider to be a pretty strong retailer. I agree with Jon — Costco is a stock to buy, put in a drawer and forget about[16].

For those of you not 100% sold, buy the Columbia Select Large Cap Value ETF (GVT[17]), an actively managed fund that invests in 36 of the best stocks from the Russell 1000. Costco, at 2.35%, is one of four retailers in the fund. Because it’s actively managed, the expense ratio of 0.79% isn’t outrageous. However, GVT has returned 18.5% annually since inception in May 2009, and this year, it’s up 25.5% — 366 basis points greater than its Russell 1000 Value benchmark.

Yum Brands

Tom Taulli wrote Oct. 10 that Yum Brands (YUM[18]) shows few signs[19] of coming out of its tailspin anytime soon. That’s not surprising. Twice in the past 16 months I’ve written about the nasty odor that emanates from its business strategy. It threw its U.S. franchisees[20] under the bus for a big payday in China, and now that the plan’s failing miserably, it has little ammunition left in its arsenal. Furthermore, investors realize that a slower-growth Chipotle Mexican Grill (CMG[21]) is still a better stock to own[22].

However, if you must own this miserable excuse for a stock — I’m embellishing just a tad — at least have the good sense to surround it with some better stocks. The iShares U.S. Consumer Services ETF (IYC[23]) has a top 10 holdings list (38% of portfolio) containing some of the best brands anywhere. Yum is weighted at 1.24% (187 holdings), so it can’t do too much damage should its misery continue for an extended period of time.

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

  1. three interesting recommendations:
  2. L:
  3. RYF:
  4. five stocks:
  5. XOM:
  6. RYE:
  7. XLE:
  8. SLB:
  9. NE:
  10. three recommendations:
  11. MTW:
  12. PKB:
  13. COST:
  14. and then there’s Costco:
  15. TGT:
  16. buy, put in a drawer and forget about:
  17. GVT:
  18. YUM:
  19. few signs:
  20. U.S. franchisees:
  21. CMG:
  22. better stock to own:
  23. IYC:

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