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Eric Dutram

Play A Consumer Recovery With These Discretionary ETFs

BJK PEJ PBS

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Although gas prices continue to threaten the economy, many consumers are beginning to feel more optimistic about their state of affairs. Household consumer confidence has risen sharply in the past few months while jobless claims are starting to trend below 380,000 on a weekly basis, encouraging some in the beaten down labor market.

Thanks to these developments, some investors are looking to push into discretionary sectors to take advantage of the rosier outlook by many. For investors seeking to play this trend in ETF form, there are a variety of consumer discretionary ETFs which could offer excellent exposure (read Time To Buy The Food And Beverage ETF?).

Yet, investors should note that many of the most popular funds in the space are retail heavy—or retail focused—ETFs. While there is nothing wrong with this for most investors, the trade is becoming increasingly crowded and often times, retail ETFs include a great detail of exposure to segments in the staples segment as well. This means that these products could be lower beta selections and thus see smaller movements than their higher beta counterparts.

For investors concerned about this, there are a number of more specialized products in the discretionary ETF world that could alleviate some of these concerns. Beyond targeting niches that could be better positioned for a consumer recovery, they could also offer investors the chance to develop a more diversified portfolio as well (see Is It Time To Buy The Transportation ETFs?).

This is because most of the ETFs on this list have a focus on mid and small cap securities which are usually absent from many portfolios in large quantities. Thus, by taking a closer look at the ETFs below, investors could both better diversify their portfolios, and position themselves to take advantage of a budding recovery in the consumer market as well:

PowerShares Dynamic Media Portfolio (PBS)

Some consumers who are just starting to feel better about their situations could look to expand their purchases of entertainment now that the economy is slowly improving. These goods are generally relatively low cost but can be both easy to cut and also easy to resume once cash becomes more plentiful.

Thanks to this, the sector can be a big beneficiary of a broad recovery and can be one of the first sectors to jump higher when consumer confidence is rising.

To play this trend, investors can aim for the PowerShares’ PBS which targets a fundamentally-weighted index of just over 30 companies. The product charges investors roughly 63 basis points a year in fees and pays out a modest 57 basis points in yield on an annual basis. Volume is also pretty solid as the product sees roughly 75,000 shares trade a day ensuring relatively tight bid ask spreads (see Time To Buy The Media ETF).

In terms of holdings, movie and entertainment companies (22%) take the top spot while internet and mobile applications come in a close second at 21%. Meanwhile, large caps make up just 45% of the fund while small and micro caps account for roughly 40% of the total assets. This suggests that the fund is tilted towards pint sized securities, giving it a smaller feel than many other products in the space.

PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ)

Beyond basic entertainment, many consumers look to expand their spending on broad leisure and entertainment goods once the economy begins to turn around. This trend benefits restaurants, hotels, and similar firms which are found in PEJ.

As a result, investors can think of this ETF as a play on entertainment than goes far beyond media, possibly also targeting ‘higher end’ leisure in the process (such as international vacations)

In order to broadly play this sector with an equal weight methodology, investors can look to PEJ. The ETF holds 31 securities in its basket and charges about 63 basis points in fees. The annual yield comes in just below 0.6% while the average volume is relatively high ensuring modest bid ask spreads (read Three Cyclical ETFs Surging Higher).

Investors should note that restaurants dominate the holdings—at 50% of the product—while movies, hotels, and casinos, all receive double digit allocations as well. From a market cap perspective, large caps take up 41% of the fund but small caps and micro caps combine to form a majority of assets at 51% of the total, ensuring small caps are well represented in the fund.

Market Vectors Gaming ETF (BJK)

Arguably the ultimate discretionary segment can be found in the casino world. Gambling can be a severe money drain and doesn’t really offer the utility or value than can be found in the restaurant or media segments.

Thanks to this, the casino world can be among the last to turn around before they see broad support from consumers. Yet, with that being said, when markets are soaring casinos can be tough to beat; profit margins in this segment tend to be far higher than in other products on this list, potentially giving investors an advantage during the early stages of a boom market (Time To Bet On The Gaming ETF?).

To play this in concentrated form, investors have Van Eck’s BJK. The product holds just over 50 securities in its basket charging investors a rather high 94 basis points in fees. Volume is also lower in this fund than in the others on the list, giving BJK higher bid ask spreads. Nevertheless, the yield is superior for this fund, coming in at just over 1.7%.

In terms of holdings, the product is well diversified from a geographic perspective. North American companies comprise half the fund while those in Asia and the Pacific region comprise another 34% of assets. Large caps do receive an outsized allocation in this fund—coming in at 57% of assets—although mid caps (25%) do receive a sizable chunk of the total as well.

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