A Shot of Diageo: ETF Alternatives for Hot Stock Picks

by Will Ashworth | November 12, 2013 6:30 am

Last week, the S&P 500 gained 0.5%, powering forward for a fifth consecutive week. Stocks are still red-hot in 2013, with the index up 26.3% year-to-date through November 8. While it’s getting harder to find value out there, InvestorPlace contributors were busy last week looking for good picks in Q4. Here are my ETF alternatives.

Small-Cap Stocks

Many investors avoid small-cap stocks fearing they’re much too volatile. So you can imagine the reaction of some investors to Tim Melvin’s two small-cap recommendations[1] for companies in Canada and Bermuda. Tim’s been investing a long time, so he knows a thing or two about value. However, most investors would be wise to surround their small-cap investments with bigger, more stable stocks.

Or you could hand the small-cap stock picking to an ETF like the First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (FDTS)[2], which employs the AlphaDEX stock selection methodology to pick small-cap stocks from the S&P Developed Markets ex-US Broad Market Index. Using enhanced indexing, the AlphaDEX selects those stocks exhibiting greater potential capital appreciation. The FDTS is a group of 392 holdings with stocks from Japan, South Korea, Canada, UK, and Hong Kong representing  68% of the portfolio. You’ll especially like this fund if you believe Japan’s renaissance will continue, as the country has the largest weighting at 34.04%. The downside — its expense ratio is an eye-popping 0.80%.

Time Warner Cable

Anytime John Malone’s name is mentioned in the media I’m always interested in seeing what’s being said about the billionaire — he’s a smart cookie. So, when Jonathan Berr wrote about all the interested parties[3] in Time Warner Cable (TWC[4]) last week, I was hooked immediately. Deutsche Bank analyst Brian Russo feels Charter Communications (CHTR[5]) will be the successful in its attempt to merge with TWC. Regardless of whether this happens, Berr sees TWC getting bigger one way or another.

For those who expect TWC to get bought, your best ETF alternative is the PowerShares Dynamic Media Portfolio (PBS[6]), which has the cable company as its fourth-largest holding, at a weighting of 5.04%. PBS invests in 30 of the biggest media companies in the US, spread across all market caps to provide investors with good diversification. Its performance in recent years has been far superior to that of the S&P 500. With all that’s happening between the content creators and the content distributors, PBS helps ensure you’re on the winning side of this battle.


Morgan Stanley (MS[7]) says there was a 300 million-case wine shortage in 2012. Charles Sizemore discussed the merits of the study in his Nov. 5 article[8]. Sizemore points out that Chinese consumption is the big reason behind the shortfall, although Reuters’ Felix Salmon believes strong production in 2013 will more than offset any slowdown from last year. Either way, Charles is more inclined to invest in a company like Diageo (DEO[9]), whose mega-brands Smirnoff, Johnnie Walker, Captain Morgan, Bailey’s and José Cuervo are some of the best-known in the world. You can’t go wrong with DEO.

Every time I recommend an alcohol stock I’m always lamenting the fact there isn’t an index that covers this very competitive industry. As it is, we’re stuck with the PowerShares BLDRS Europe Select ADR Index Fund (ADRU[10]), which is composed of 100 of the biggest European ADRs available. It holds Diageo at a weighting of 2.22%. Its performance over the past 10 years has been approximately in line with the S&P 500. Although some might still be wary of Europe, I think the worst is behind it. Not to mention the annual expense ratio is a very modest 0.30%.


Qualcomm’s (QCOM[11]) Nov. 6 earnings report offered a weak outlook for Q1 2014. Tom Taulli wondered whether this presented an opportunity to buy the tech giant’s stock at an attractive valuation. Assessing its three pros and cons[12], Tom decided that the company is well-positioned to benefit from the long-term growth in mobile. Furthermore, with a forward PE ratio of 14 and a decent dividend yield to boot, it’s a great way to play the trend.

It’s never a bad idea to pick an inexpensive ETF. Here, I’m going with the Vanguard Information Technology ETF (VGT[13]), which charges a scant 0.14% annually, and holds QCOM in the top 10 at a weighting of 3.39%. It might not be the 13% weighting Apple (AAPL[14]) gets, but it’s still plenty. It’s important to consider that the VGT has a total of 414 stocks but the top 10 represents 54% of the $4.1 billion in total net assets. You’re definitely betting on the biggest players in tech.


It’s rare you see a win/win situation when it comes to mergers, but the proposed spin-off of Weyerhaeuser’s (WY[15]) real estate company, which will then combine with Tri Pointe Homes (TPH[16]) to form a very formidable home builder, is a great one. Aaron Levitt thinks you should buy WY before the deal is consummated[17] so you can benefit from the real estate combination, not to mention the benefits of owning a pure-play timber company.

When picking an ETF here, you don’t won’t to go too deeply into the timber business. Therefore, I’d go with the PowerShares Active U.S. Real Estate Fund (PSR[18]), which owns a group of 50 stocks selected from the FTSE NAREIT All Equity REIT Index. Weyerhaeuser is the fourth-largest stock with a weighting of 5.3%. Two caveats: It’s unlikely that PSR will hang on to the TPH shares once the merger’s completed because TPH isn’t a REIT. In addition, the expense ratio is high at 0.80%. Other than that, it’s a good way to play the Weyerhaeuser deal.

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

  1. two small-cap recommendations: https://investorplace.com/2013/11/cheap-stocks/#.UoDxK5EdUpE
  2. FDTS): http://studio-5.financialcontent.com/investplace/quote?Symbol=FDTS)
  3. interested parties: https://investorplace.com/2013/11/time-warner-cable-run/#.UoD3g5EdUpE
  4. TWC: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWC
  5. CHTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHTR
  6. PBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBS
  7. MS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MS
  8. Nov. 5 article: https://investorplace.com/2013/11/wine-stocks-diageo-deo/#.UoD9vpEdUpF
  9. DEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=DEO
  10. ADRU: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADRU
  11. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  12. three pros and cons: https://investorplace.com/2013/11/buy-shares-qualcomm-3-pros-3-cons/#.UoEEUJEdUpE
  13. VGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=VGT
  14. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  15. WY: http://studio-5.financialcontent.com/investplace/quote?Symbol=WY
  16. TPH: http://studio-5.financialcontent.com/investplace/quote?Symbol=TPH
  17. buy WY before the deal is consummated: https://investorplace.com/2013/11/weyerhaeuser-tri-pointe-wy-tph-timber/#.UoEIr5EdUpE
  18. PSR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSR

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