The month of December is normally a good time to get in on consumer discretionary stocks thanks to people’s shopping spree in the holiday season. Thus, the department stores, apparel stores, and other retailers are all now front and center in business headlines.
This year, the sector is experiencing tough holidays mainly due to a difficult year-over-year comparison thanks to a shorter holiday season due to fewer weekends between Thanksgiving and Christmas this year. A leading provider of shopper analytics – ShopperTrak – predicts 10% less holiday retail traffic than the previous year.
Also, consumers are presumably in two minds about where the economy is heading in the near future. A Likely Fed taper in the near term might have made them cautious about their discretionary spending. However, there is still plenty of reason to be cheerful about this space this holiday season, including some recent data points.
Bullish Sector View
The discretionary sector has done quite well in Q3 with a beat ratio of 79.3% for earnings and 31.0% for revenues. Earnings beat ratio was in fact the fourth highest among 16 sectors comprising the S&P 500 index (as per the Zacks Methodology).
Though softened from the Q2 level, total earnings for the sector went up 11.9% on 4.6% higher revenues in Q3. Next year, the consumer discretionary sector is expected to expand 15.3% on the bottom line and 5.5% on the top line. Growth projections are higher than most other sectors forming the S&P 500 index.
Consumer confidence is surely faltering right now, but has improved remarkably from what it was two years ago. Also, a recent report said that the consumer sentiment index in December bested the forecast and jumped to the highest level (82.5) in five months.
Investors should note that consumer discretionary does not comprise only retail. Restaurants, hotels, leisure services and several other home appliances segment account for a major slice of the sector which are displaying better signs of healing.
As far as GDP growth is concerned, the revised Q3 data (3.6%) was quite overwhelming given the unsteady global economic backdrop. Barring the latest jump in initial jobless claims, overall job market tone and ISM readings carried out the winning momentum. This should actually aid the consumer discretionary sector in the New Year (read: Is This ETF a Better Bet in the Consumer Space?).
Small-Caps are Doing Better
If investors want to get in on this uptrend, small-caps should be an intriguing option. Small-caps have the potential to offer good returns in an up trending market and play mostly in the domestic arena. With Taper fears building up for next year, we advise investors to make the most of the inherent U.S. economic growth rather than being exposed to foreign lands which are highly vulnerable to the taper aftershock (read: 3 Small Cap ETFs Leading the Market Higher).
Notably, the S&P SmallCap Consumer Discretionary index added a whopping 41.4% YTD return (as of December 11, 2013) against a 32.9% rise in S&P Small Cap 600 index and a 21.9% gain in the S&P 500 index. Given this bullish trend, a look at some of the top ranked ETFs in the small-cap consumer discretionary space could be a good way to target the best of the segment.
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 (see all the Zacks ETF Categories here).
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 top 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 small-cap discretionary space, we have taken a closer look at the top ranked PSCD. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:
S&P SmallCap Consumer Discretionary Portfolio (PSCD - ETF report) which made its debut in 2010 and now has $115.5 million in AUM, is invested in 101 securities. The product puts around one-fourth of its total assets in the top 10 holdings, suggesting little concentration risk.
Nevertheless, assets are well spread out across the components and none of the stocks holds more than 3.83% of the assets. Brunswick Corp. (3.83%), Fifth & Pacific Co. (3.69%) and Wolverine (3.0%) hold the top three positions in the basket.
As far as industries go, Specialty retail (29%) takes up the top spot followed by Apparel (16%) and Restaurants (15%).The fund is quite cheap in the consumer discretionary equities ETF space with 29 bps of annual fees which is pretty lower than the average expense ratio (52 bps) of the space.
PSCD is a nice blend of growth and value stocks with equal exposure. Notably, the fund has almost all its coverage in the U.S. which clearly explains why it can be a wise bet in a global slowdown (see more in the Zacks ETF Center).
The fund’s performance this year has been stellar, adding a little over 40% in the YTD time frame (as of December 11). However, higher return comes at the expense of ‘high’ risk outlook, though this ETF has certainly been a star performer in 2013.
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