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With improving U.S. economic indicators since the start of this year, cyclical stocks have begun to exhibit promising trends. Consumer stocks, in particular those that focus on consumer discretionary spending, have since then been gaining momentum.
After all, the sentiment is very strong for both jobs and the housing market, helping many to feel better about their economic situation. Plus, inflation also remains contained at 1.4% as of May 2013, keeping Americans’ purchasing power intact.
All these lead to the general optimism in the sector and encourage consumers to buy more discretionary products and services. Statistics, too, bear out this relatively favorable trend. (Read: 3 Top Ranked Consumer ETFs to Buy Now).
The Conference Board came out with its Consumer Confidence Index – a barometer of the U.S. consumer health – on June 25, 2013. The index improved by leaps and bounds consecutively in April, May and June.
The Index stood at 81.4, up from 74.3 in May, marking the five-year high level. Consumers remain optimistic on the country’s business outlook, indicating a bullish trend for the long term. The Consumer Discretionary sector is expected to report 8.9% earnings growth and Retail is expected to report 5.9% earnings growth for the second quarter (Read: Winning Strategies for the second half).
Given these positive developments, a look at some of the top ranked ETFs in the space could be a good way to target the best of the segment. In order to do this, investors can check the Zacks ETF Rank and find the top consumer discretionary ETF best suited for their purpose.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the consumer discretionary sector, we have taken a closer look at the top ranked FXD. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ and is detailed below:
Launched in May 2007, First Trust Consumer Discretionary AlphaDEX Fund (FXD) – is an ETF designed to provide broad exposure to the US consumer discretionary sector. FXD tracks the StrataQuant Consumer Discretionary Index (see more in the Zacks ETF Center).
The fund is by far one of the most popular Consumer Discretionary equity ETFs with more than $735 million in AUM. Holding 131 stocks in its basket, the product puts only 13.82% of its total assets in the top 10 holdings, suggesting very little concentration risk.
The sectors that the fund is more tilted towards include Specialty Retail and Media with double-digit weight attached to each. These two hold more than one-third of the total investment. Nu Skin Enterprises Inc. (NUS), Netflix Inc. (NFLX - Analyst Report) and Tesla Motors Inc. (TSLA - Analyst Report) are its top three holdings.
However, the choice is a bit pricey in the space, as it charges 70 basis points a year in fees which is a bit higher than the average expense ratio in the consumer discretionary space. The reason for this extra cost is the AlphaDEX methodology, which seeks to narrow down the consumer market to only the best positioned companies.
It is a slightly more ‘active’ choice in the space thanks to its index makeup. Basically, more ‘active’ funds like FXD seek to beat traditional indexes through superior benchmark construction. This approach results in relatively higher fees and turnover than the simpler funds in the space (also read Time to Buy This High Ranked Consumer ETF?).
Its daily trading volume of around 150,000 shares is also quite light compared to more well known consumer discretionary ETFs like Consumer Discretionary Select Sector SPDR Fund (XLY - ETF report) and SPDR S&P Retail ETF (XRT - ETF report) though FXD still takes the dominant position in the consumer discretionary ETF list.
Capitalization-wise, the fund is almost uniformly distributed with a mid cap focus of 48% followed by a large cap and small cap focus of 37% and 15%, respectively. Style-wise also, the fund structure is biased towards growth funds.
Greater exposure to mid cap as well as growth stocks may call for higher volatility, but helps to garner solid returns. As such, we have a ‘High’ risk outlook for FXD in the near term (see the full list of top ranked ETFs).
With the U.S. market showing early signs of recovery in the latter half of 2012, FXD has performed better. The ETF climbed upwards in 2013, returning about 43.7% in the one-year period ending July 15, 2013 and about 24.6% in the year-to-date time frame. Over the last one-year period, the return from FXD outperformed the S&P/ TSX Capped consumer discretionary index (31.1%) as well as S&P 500 ETF (26.0%).
The product also pays an annual dividend yield of 1.01%. FXD hit a low of $19.85 and a high of $28.90 in the last one year. The fund is currently hovering around its 52-week high price.
Amongst the top performing Consumer Discretionary ETFs, FXD is a nice combo of relatively low valuation and a splendid price performance. Further, the underlying industries of the fund like hotels and restaurants, leisure, household durables and a selection of auto retailers are poised to surge ahead on account of pent-up demand, suggesting the fund is a quality choice to tap the space.
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