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With the jobs report showing some strong gains on the employment front and commodity prices under control, many consumers are starting to spend once more. This trend could definitely stay in place if confidence levels remain high and if housing prices continue to make consumers feel better about their fiscal situations.

Investors have started to take note of this as well, as many have bought up consumer ETFs like (XLY - ETF report) over the past couple of months, pushing these to solid gains in the year-to-date time frame. In fact, this sector has proven itself to be a market leader over the past few months, and with the solid trends in place this could definitely continue.

For this reason, investors may want to consider any number of the consumer discretionary ETFs on the market today. However, investors do have a bevy of choices at their disposal in this corner of the market, so it may be difficult to separate these seemingly similar products (see Two Zacks #1 Ranked Consumer Discretionary ETFs).

While looking at expenses or structural integrity could be an option for sliming the field, a possibly better way to narrow down the choices and focus on the best funds is by using the Zacks ETF Rank.

Zacks ETF Rank in Focus

This ranking system looks to provide investors with a forward looking way to narrow down the field via a number of quantitative factors. Additionally, it also looks to separate funds into separate risk levels so that ETFs are grouped within similar volatility brackets.

At the heart of this process for sector ETFs is the Zacks Industry Rank. This view, which is based on earnings estimate revisions, intends to show investors which segments are seeing the best relative performances from an analyst look, and thus may be poised to lead as more investors bet on these positive stories.  

Beyond this, we also look at a number of ETF specific factors such as expense ratios and bid ask spreads in order to get a holistic view of a particular fund. Once we have done that, we crunch the numbers and rank the funds on a traditional Zacks scale with 1 being a ‘Strong Buy’ and 5 being a ‘Strong Sell’ (see more in the Zacks ETF Rank Guide).

Using this method on the consumer discretionary sector we have found several funds that have a Zacks ETF Rank #1 (Strong Buy), and thus could be on a solid path in the weeks and months ahead. However, one top Ranked fund that stands out—and that may have flown under your radar—is the Guggenheim S&P Equal Weight Consumer Discretionary ETF (RCD - ETF report).

RCD Under the Microscope

RCD is a bit different than many other ETFs in the space as it utilizes an equal weight methodology. This is accomplished by tracking the S&P Equal Weight Consumer Discretionary Index, and means that all the companies in the benchmark receive the same allocation at the rebalancing date.

This approach is very different from those that give the biggest weight to the largest companies and helps to spread assets around to smaller caps. Additionally, some investors believe that it prevents getting too heavy into former winners as gains are taken off the table and everything is equalized at the rebalancing date (read Lower Wal Mart Exposure with These Consumer ETFs).

Thanks to this technique, the roughly 80 stock portfolio doesn’t have more than 2% in any one stock and a pretty spread out holdings profile. Large caps still make up a big chunk of assets—60%-- but far less than in cap weighted products like XLY (which has 89% of its assets in large caps).

Investors should also note that the portfolio is well diversified among the various industries in the space, although there is a definite tilt towards retail. There is also a skew towards growth stocks as these account for roughly 50% of the portfolio.

The approach has largely paid off in terms of performance though, as RCD has gained about 18.2% so far in 2013, and nearly 28% over the past year. Both of these metrics are favorable when compared to others in the space and the broad market, suggesting that RCD has been an excellent choice for many investors.

However, it is worth noting that the ETF hasn’t really caught on with many, as the ETF has less than $60 million in total assets. This produces a small volume level, but thanks to the liquid nature of the underlying holdings, this doesn’t really result in that big of a bid ask spread so total costs shouldn’t be much more than the 50 basis point expense ratio.

Bottom Line

RCD is probably an ETF that you have overlooked in the consumer market, although it has proven itself to be an outperformer. The fund is a bit pricey when compared to other choices in the space, while volume isn’t great, though neither one of issues should be a big problem when you consider its performance history as of late (also see Top Three Emerging Market Consumer ETFs).

Furthermore, the fund does offer up a potentially better way to target the consumer market that doesn’t leave a portfolio too exposed to typical names like HD, WMT, or other large cyclical stocks. So if you are looking to play on the solid consumer trends in the market, don’t forget about RCD. It is a top Rated ETF that has beaten out similar products in 2013, and could be poised to lead the way higher as well.

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