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The consumer sector has held up pretty well this year buoyed by growing consumer confidence and increased spending. A number of encouraging data in some key areas continue to fuel optimism in the space.
The labor market is showing clear signs of healing, housing markets are on the recovery path, and oil prices are at moderate levels. This suggests a continuation of the bull run in this important market segment as consumers have enough cash to spend on discretionary products and services.
Given this, the equity markets are holding up quite well, though the uncertainty over the Fed’s policy and the rising tensions over the budget and debt ceiling negotiations have kept the market in check lately (read: 3 Sector ETFs to Watch for the Budget Battle).
Due to this uncertainty, investors are definitely looking for a safe and quality choice in this surging sector. For those investors, the Guggenheim S&P Equal Weight Consumer Discretionary ETF (RCD) could be an excellent play.
RCD in Focus
The fund offers exposure across the consumer discretionary market with an equal weight methodology. It tracks the S&P 500 Equal Weight Index Consumer Discretionary index and holds 83 securities in its basket.
In terms of industries, specialty retail takes the top spot at roughly one-fifth of the total, followed by modest allocations to media and hotel restaurants.
The product gained over 29.6%% in the year-to-date time frame and 32.7% in the trailing one-year period beating the broad sector fund – Consumer Discretionary Select Sector SPDR Fund (XLY - ETF report) – by roughly 100 bps. This implies that RCD could lead the way higher as well.
This is especially true given that RCD currently has a Zacks Rank of 2 or ‘Buy’ with ‘High’ risk outlook (read: 3 Top Ranked Consumer ETFs to Buy Now).
Why RCD is Beating XLY
The outperformance was mainly driven by the equal allocation across various securities, as single firm holds less than 1.3% of the total assets. This prevents heavy concentration and provides a nice balance in a particular stock or group of securities.
With quarterly rebalancing, the product tends to cash in on the overvalued segments and reinvest in the underperforming ones, potentially allowing outperformance if the trends reverse (read: Overweight These Equal Weight ETFs in Your Portfolio).
While the fund minimizes concentration risk, it charges a bit higher fee of 50 bps compared to the expense ratio of 0.18% for XLY. The fund has amassed $73.3 million in AUM while volume is a little light. However, the liquid nature of the underlying holdings should keep bid/ask spreads tight.
Further, the fund has a slight tilt toward large caps, as these make up for 65% share in the fund’s portfolio. Mid cap takes the remaining portion with only 2% going toward small caps. It appears that the large caps are poised to become strong performers in the remainder of the year given the strong economic fundamentals.
This has started to materialize from the start of the third quarter from a fund flows look. Notably, the most popular large cap ETF (SPY - ETF report) pulled in over $7.7 billion compared to $593 million for mid cap (IJH) and under $4 billion for small cap (IWM) counterparts. This suggests that investors are cycling back to large caps, which tend to be the most stable, for their exposure in an uncertain environment.
Furthermore, RCD puts more focus on growth stocks with three-fifths exposure. Growth investing is basically a momentum play, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged uptrend). This is because growth stocks in the ETF portfolio harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices.
As a result, the combination of large cap and growth stocks helps to earn more returns even in an uncertain environment (read: Bet on This Top Ranked Large Cap Growth ETF).
This consumer ETF proved more beneficial to investors compared to the other products in the space (see: all the Consumer Discretionary ETFs here). The solid run in the product is expected to continue in the final quarter as the sentiments in the broad economy are on the rise.
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