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The U.S. economy is experiencing signs of recovery, though not very brisk but at least better than what it has been in the past few years. The year has also experienced a broader stock market gain, which has helped to add to the optimism.
Employment is also rising which all the more adds to the consumer hopefulness as we head into the key holiday season. With rising consumer optimism, the one sector which is definitely going to benefit is the discretionary segment of the consumer sector (Play a Consumer Recovery with These Discretionary ETFs).
The consumer discretionary industry is highly sensitive to economic cycles. At the time of recession, when consumers lose confidence in the economy, only necessities are taken into account and savings tend to increase.
Consequently, spending on consumer discretionary is the first to drop. So, it can be considered as the barometer of rising income levels of consumers and an improving sentiment in the economy.
When the economic environment turns favorable or with the rise in consumer confidence in the economy, stocks of consumer discretionary industry tend to enter a bull phase. If the current positive trend continues, the stocks in this corner of the market will see further gains.
Investors seeking an ETF investment which includes stocks focusing on luxury or general discretionary items should tilt their portfolio towards these top rated ETFs in the space: Market Vectors Retail ETF ( RTH - ETF report ) and First Trust Consumer Discretionary AlphaDEX Fund ( FXD - ETF report ) (Three Cyclical ETFs That Are Surging Higher).
Both these #1 Zacks ETF Rank (Strong buy) funds in the consumer discretionary space could be appealing for those seeking more discretionary exposure in their portfolios as we expect both to outperform their peers over the next few months.
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. 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 five ranks within each risk bucket. Thus, the Zacks 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 U.S. consumer discretionary market, we have taken a closer look at the top ranked FXD and RTH below:
One targeted play on the consumer space is with the top rated First Trust Consumer Discretionary AlphaDEX Fund. This fund represents a more ‘active’ approach to ETF investing which employs the AlphaDEX methodology. This indexing method ranks stocks on growth and value factors in order to determine weightings.
This approach produced a fund with total holdings of 124 stocks, assets under management of $468.9 million, and a trading volume of 1,200,800 per day (Guide to the 25 Most Liquid ETFs).
Currently, the fund has the most exposure to mid cap and large cap securities with a very small portion invested in small caps. From an individual security perspective, the fund is pretty well spread out with the top 10 holdings making up just 15.1% of the total assets.
Top holdings include Jarden Corp, General Motors, and TRW Automotive Holdings Corp (Automotive Industry ETFs in Focus). The fund charges a hefty expense ratio of 70 basis points. Nonetheless, the fund has performed really well in the past one year, delivering a return of 10.8%.
Given the promising trends for cyclical stocks at this time, some investors may want to consider buying into this consumer discretionary ETF in the short term. If the economy continues to rebound, we could see further gains in the space making this a potentially good time to get into this surging sector.
Market Vectors Retail ETF (RTH)
Some consumers who are just starting to feel better about their situation could look to expand their purchases of luxury items now that the economy is slowly improving. 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 Market Vectors’ RTH which targets the Market Vectors U.S. Listed Retail 25 Index. The fund has a shallow portfolio comprised of 26 securities with approximately 67.7% exposure in the top ten holdings. This exposure is more focused on large cap and mid cap companies, with giant caps taking up most of the biggest spots.
The fund trades with a volume of 178,100 shares a day, and has assets under management of $19 million. RTH charges an expense ratio of 35 basis points annually, making it a relatively low cost choice in the space.
Among individual holdings, Wal-Mart occupies the top position in the fund at just over 14% of the total (Lower Wal-Mart Exposure with These Consumer ETFs). RTH does, however, offer a significant amount of exposure to the online retail behemoth, Amazon, Inc, giving the fund a decent exposure to e-commerce as well.
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