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Dip Into Dunkin: ETF Alternatives for Hot Stock Picks

This week we look at consumer staples, services, REITs, financial, and technology stocks.

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Stag Industrial

Charles Sizemore assures us that Stag Industrial (STAG) is a good play in the small- and mid-cap REIT industry. The most compelling reason for owning its stock according to Sizemore: Six company officers bought in the past quarter, and all of them were open market purchases, not option exercises, etc. That kind of activity is a telltale sign that a stock might be cheap. And with a 5.5% yield, STAG also provides income investors with a reasonable dividend.

For an ETF alternative, I suggest a fund that I don’t believe I’ve ever recommended before — the PowerShares Premium Yield Equity REIT Portfolio (KBWY), composed of 33 small- and mid-cap REITs weighted by dividend yield. STAG is the sixth-largest REIT at a weighting of 3.83%. The third-largest holding is EPR Properties (EPR) at a weighting of 6.1% — a stock that I’ve liked for some time because of its focus on entertainment. The ETFs current distribution yield is 4.33%, which isn’t huge, but its performance over the past year is 913 basis points higher than the Vanguard REIT ETF (VNQ), the largest REIT ETF in terms of assets. In other words, it has some gusto.

CBOE Holdings

I’ve recently started exploring the idea of using options to generate income. So Jim Woods’ recommendation to buy CBOE Holdings (CBOE) before its Q3 earnings caught my attention. CBOE is the largest options exchange in the US; it has been growing revenue and earnings at a reasonably strong clip. Although CBOE’s stock is up almost 70% over the past year, its technical chart still looks very bullish. I think Jim’s bang on when it comes to CBOE.

In order to get yourself some good exposure to CBOE, you need to invest in an ETF focused on capital markets. The iShares U.S. Broker Dealers ETF (IAI) has CBOE at a weighting of 4.39% — the 11th largest holding out of 22 stocks. Despite US stock ownership at 15-year lows, I see this collection of businesses doing well over the next 2-3 years. However, if you’re worried about the concentration, you might consider the PowerShares S&P MidCap Low Volatility Portfolio (XMLV), which invests in the 80 mid-cap stocks from the S&P MidCap 400 with the lowest volatility over the past 12 months. The stock with the lowest volatility of the 80 gets the biggest weighting and so on. CBOE comes in at 1.28%, only 39 basis points less than the largest holding in the fund. The downside — financials and utilities represent almost 70% of the portfolio.


Any time a stock is up 250% year-to-date, a pros and cons examination of that stock is usually going to have some headwinds. This past week, Carla Lake provided a dissenting vote on Netflix (NFLX) explaining that its valuation is just too darn high. She feels strongly that, as a middleman, its costs will never be kept in check long enough to make a reasonable profit. I personally feel Netflix is in a far stronger position today than it was 12-18 months ago. Who’s right? That’s an answer we won’t know for some time.

In the meantime you can sit on the fence by purchasing the First Trust ISE Cloud Computing Index Fund (SKYY), which is designed to track the performance of companies involved in cloud computing. It’s a modified equal-weight fund with stocks across the market-cap spectrum; Netflix is the third-largest holding at 4.33% of the portfolio. For those that can look beyond the cloud’s privacy issues, this fund has tremendous potential over the next 2-3 years. Not the least of which is thanks to Netflix.

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

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