ETFs for the Cadbury War

Kraft's ( KFT) hostile bid for Cadbury ( CBY) could be the first chapter in an all-out bidding war that could also involve Hershey ( HSY), Pepsi ( PEP), Nestle and Mars (with Warren Buffett's cash).

Such a struggle could help to boost shares of Powershares' Dynamic Foods ( PBJ), State Street's Consumer Staples Select Sector SPDR Fund ( XLP), Vanguard's Consumer ETF ( VDC) and iShares' Consumer Goods ( IYK).

Exchange-traded funds that track the potential suitors could get a boost from all the attention.

Buy This ETF: PBJ

XLP is the largest fund in this group, with more than 4.5 million shares changing hands each day. The fund's top holdings include consumer staples giants like Procter & Gamble ( PG), Wal-Mart ( WMT) and Philip Morris ( PM). The drawback is that this fund is capitalization weighted and thus has high concentrations of assets in its top holdings. More than 66% of XLP's assets are dedicated its top 10 components.

Although VDC has a nearly perfect tracking correlation with XLP, it tracks 110 companies, as opposed to XLP's 40 holdings. VDC also offers investors large-cap exposure to giants in the consumer goods sector. While this fund may not be as highly concentrated as XLP, it is less liquid. VDC's three-month average daily trading volume is less than 50,000 shares.

IYK offers similar exposure as XLP and VDC but excludes the retail companies found in XLP and VDC. IYK's holdings include large, mature firms that offer stable returns. The average market capitalization of the components in IYK's basket is about $30 billion. IYK's fee of 0.48% is also slightly higher than VDC's 0.25% fee.

If Nestle emerges as a strong contender for Cadbury, investors may want to consider the iShares Switzerland ETF ( EWL). Even though this ETF has only 20.7% of its portfolio dedicated to consumer staples, 18.5% of this sector's allocation is top holding Nestle.

Nestle's strong cash position makes it a likely suitor. Nestle recently sold 25% of eye-care business Alcon to Novartis ( NVS) for $11 billion in cash. If it's cash that Cadbury's looking for, Nestle could be the company to step in.

Buying EWL for Nestle alone is not a strong move, but other compelling reasons could draw investors to this fund. The recent World Economic Forum's report on the most competitive economies revealed that Switzerland had knocked the U.S. from the top spot.

The consumer goods sector has traditionally performed well during periods of economic uncertainty. Many of the top companies in ETFs like IYK and PBJ are large, diversified businesses. Bidding over Cadbury could drag on for months, and the attention that it could draw to the sector make these funds compelling buys in the meantime.

At the time of publication, Dion Money Management owned IYK.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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