A Sector Bet and a Better S&P 500 Fund

04/12/2010 12:00 am EST

Focus: FUNDS

Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

James Lowell, editor in chief of Fidelity Investor and of Forbes ETF Advisor, recommends two timely moves, one involving a sector and the other a play on dividends.

Credit the market’s ability to remain forward looking; the recovery rally continues, and it looks likely to do so. The consumer income and spending numbers we got at [last] month’s end weren’t barn burners, but they did exhibit a pulse of spending (for the fifth month in a row), which isn’t just a pulse but a plus if jobs start to turn around.

How so? If consumers are willing to spend in the vacuum of jobs, think what will transpire when more employed people show up store side in addition to more able and willing buyers who are already there. The flip side: if jobs stall or fall, the pain will be felt at the global mall.

President Obama [recently] announced an oil exploration initiative; in large part a political carrot to wield the green energy shtick, but still significant enough to [boost] Fidelity Select Energy Services (FSEFX).

True, the actual drilling won’t begin any time soon. So why Energy Services, now? It takes the Levi Strauss approach: sell the picks and axes to the miners, or in this case, the pipes, platforms, and transports to the drillers, and make a profit on the pursuit rather than the product such searches could produce. Pressed to capacity at current low-level recovery demand, the group is set to rise in tandem with the recovery while the new scope and scale of potential hunting grounds could sustain a gush among these stocks down the road. (Energy Services closed Friday below $27.—Editor)

Fidelity Dividend Growth (FDGFX) [is what I call] a better “500 fund.” This is not the Dividend Growth fund of old; top-ranked Larry Rakers took over this fund at the worst possible moment in market history, September 2008. It takes a manager about three months to unwind the previous manager’s positions and re-position to his or her own course. Rakers’ broadly diversified portfolio (500-plus issues, with 16% of assets in top ten names like Wells Fargo, Pfizer, JP Morgan, Cisco, Coca Cola, Google, and HP) bested the Standard & Poor’s 500 last year (by nearly two times), and is well positioned to ride to better-than-benchmark returns this year. (Dividend Growth closed Friday at 25.90—Editor.)

[An ETF alternative to Dividend Growth] is PowerShares International Dividend Achievers (NYSEArca: PID), [which] seeks investment results that correspond to the price and yield performance of the International Dividend Achievers Index. It began trading in September 2005 and has a market value of over $415 million.

The top three sectors are telecom services (18%), energy (17%), and financials (14.6%). The top ten holdings are Grupo Aeroportuario del Sureste, TELUS, Mobile TeleSystems, Vodafone Group, BP Plc, Teekay, National Grid, Total Sa, Telefonica, and Banco Santander. (PID closed Friday below $15—Editor.)

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