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ETF News And Commentary

After rough trading in the first quarter, the consumer discretionary sector seems back on track. A weak holiday shopping season and brutal winter have weighed on the performance of these stocks for the whole of the last quarter, and make these attractively valued at current levels.

The current valuation coupled with regained momentum in the U.S. economy following the winter slump is compelling investors to recycle their exposure to this sector. This is especially true with the recent slew of positive indicators. U.S. manufacturing index (PMI) rose to 53.7 in March from 53.2 in February while auto sales jumped 5.7%.

Consumer spending, accounting for more than two-thirds of U.S. economic activity, rose 0.3% in February, indicating the largest increase in three months. Additionally, the latest report shows that the hiring in the U.S. has picked up for the second consecutive month to 192,000 in March, though slightly down from revised 197,000 in February (read: Time to Bet on Consumer Discretionary ETFs?).

Further, the recent consumer sentiment survey has also been extremely positive with the latest reading surpassing expectations. The monthly Consumer Confidence Index, measured by the Conference Board, climbed to the highest level in six years to 82.3 in March from 78.3 in February. Moreover, a surging stock market and recovering housing market would propel the sector higher further ahead in the year.

Investors seeking to take advantage of the beaten down consumer discretionary sector could make a play on the following ETFs given that economic fundamentals will continue to strengthen at least in the near term (see: all the Consumer Discretionary ETFs here):

Consumer Discretionary Select Sector SPDR Fund ((XLY - ETF report))

This ETF is the largest and the most popular product in the consumer discretionary space with AUM of more than $5.8 billion and average daily volume of roughly 5.9 million shares. Holding 86 securities, the product is moderately concentrated on its top 10 holdings with Walt Disney (DIS - Analyst Report), Comcast (CMCSA - Analyst Report) and Amazon (AMZN - Analyst Report) taking the largest share at over 6% each.

From a sector look, media takes the top spot with 29.6% of assets, followed by specialty retail (17.7%), hotels and restaurants (14%), and Internet retail (11.3%). The fund charges 16 bps in fees per year and lost around 1.3% in the year-to-date time frame. XLY has a decent Zacks Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: A Comprehensive Guide to Retail ETFs).

Vanguard Consumer Discretionary ETF ((VCR - ETF report))

This ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 374 stocks in its basket. This is the low choice in the space, charging investors just 14 bps in annual fees while volume is also solid at over 157,000 shares a day. The product has managed $1.3 billion in its asset base so far.

The fund is widely spread across a number of sectors and securities. Movies and entertainment, cable and satellite, and internet retail are the top three sectors accounting for combined 31.60% of assets. The top three firms – DIS, CMCSA and AMZN – holds less than 5% of assets each. VCR lost nearly 0.6% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

Guggenheim S&P Equal Weight Consumer Discretionary ETF ((RCD - ETF report))

This fund provides equal weight exposure to 83 U.S. consumer stocks by tracking the S&P 500 Equal Weight Consumer Discretionary index. The ETF has amassed $96.4 million in its asset base while charges 0.40% in expense ratio. Volume is light as it exchanges more than 22,000 shares per day.

Within the consumer discretionary sector, specialty retail takes the top spot at roughly one-fifth of the total, followed by modest allocations to media, hotel restaurants & leisure, and household durables. RCD is almost flat in the year-to-date time frame and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook (read: 5 Best Performing ETFs of the 5 Year Bull Run).

Bottom Line

While these products have seen rough trading since the start of the year, the trend is rebounding of late and will continue to do so at least in the near term. This is because the U.S. economy is again showing signs of life with strengthening fundamentals and rising sentiments in the broad economy.

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