Jamming on PBJ: The Exchange Traded Fund That’s Been on a Tear

This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with minyanville.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

This ETF may offer an extra layer of protection against downside risk versus individual equities.

Last week I wrote about food stocks and offered a list of the companies I like (see ‘Pass the Ketchup!’: Why Food Stocks Should Not Be Overlooked).

The thesis on food stocks is simple: Aggregate demand never diminishes. This doesn’t mean there’s no risk in food and beverage companies. There’s plenty. Remember, highflier Green Mountain Coffee Roasters (NASDAQ:GMCR) is trading at about half of its August 2011 peak. But companies with proven management teams, strong balance sheets, and a large portfolio of products can enjoy twin growth drivers: grabbing share from their less nimble brethren and capitalizing on growing organic demand.

Still, I understand, picking individual stocks can be unnerving for some. My solution: PowerShares Dynamic Food & Beverage ETF (NYSEARCA:PBJ), which has been on a tear over the past three years returning on average 16.18% versus the Spider S&P 500 ETF (NYSEARCA:SPY) whose average total return was a respectable, but nonetheless much lower total return of 12.54% (to March 30). Over the past 12 months, PBJ has delivered a spectacular 20.42% versus SPY’s 10.5%, or about half of the total return of PBJ.

As an ETF, PBJ delivers the standard benefits: diversification and low costs (though with an expense ratio of 0.63% PBJ is more expensive than many other ETFs; by comparison, the expense ratio of SPY is 0.09%).

I would posit that PBJ may offer an extra layer of protection against downside risk versus individual equities. That is, while individual stocks contain portfolios of products – Hershey Co (NYSE:HSY), for instance has 67 brands with possibly hundreds of individual products – PBJ increases this by an order of magnitude, by combining the product portfolios of some of the largest brand curators in the world. Below the top holdings of PBJ:

After a run like this, is PBJ too frothy to get in? I would say no. Reasons: First, Warren Buffett’s acquisition of Heinz (NYSE:HNZ) announcement on February 14 of this year has lifted the P/E ratios of almost all food and food-related companies. Once Mr. Buffett put his money where his mouth is by paying a premium for HNZ, investors bid up the shares of other food companies. For instance on February 13, 2013, General Mills (NYSE:GIS) had a P/E ratio of about 14.7x, while today it’s just over 17x. Similarly, Hershey had a multiple of about 22.3x while today it’s approximately 24.5x. In both cases, the “Buffett Premium” (as I like to call it) is about two points. As these multiples are applied to the earnings stream, I think it will continue to reward investors, who like Buffett, also put their money where their mouths are.

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