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Forget Retail, Focus on Broad Consumer ETFs

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While the recent spate of economic data has eased fears of a recession in the U.S., weak retail sales data for February and a downward revision to January retail sales point to some degree of consumer caution amid volatility in the financial markets.

This is especially true as retail sales dipped 0.1% in February and January retail sales were revised downward to a 0.4% decline instead of a 0.2% increase reported last month. This might raise fresh concerns over economic growth prospects. Despite solid job growth, a moderate rise in wages and cheap fuel, consumers are cautious about their spending habits and are keen on saving more (read: Retail ETFs on Fire After Robust Results, Upbeat View).

The retail sales data is an important piece of information not only for retailers, but also for the broader markets. This is because it helps to gauge the value of retail purchases and gives an idea of the consumption growth pattern, which in turn plays a vital role in the growth of the economy. As such, it is the key barometer for overall consumer spending, which accounts for more than two-thirds of the U.S. economic activity. As such, investors have turned cautious on the retail sector but might want to look at the broad consumer discretionary space.

Why Broad Consumer Looks Better?

The economy has shown strong resilience amid heighted global volatility and uncertainty, suggesting that consumer confidence has been on the rise. The recent consumer sentiment survey for February has been slightly positive with the final Thomson Reuters/University of Michigan index coming in at 91.7, up from preliminary reading of 90.7. However, it is slightly below 92 recorded in January.

Additionally, the auto industry is booming, the manufacturing sector seems to be stabilizing with accelerated production and steady new orders, and housing market recovery is expected to gather speed in the coming spring selling season (read: Are Housing ETFs Ready to Ride on Spring Selling Season?).
Further, the Fed is unlikely to raise interest rates in today’s meeting. This should infuse further optimism into the economy. This is because cheap financing will continue to entice consumers to buy more homes and avail auto loans, thereby giving a boost to the consumer discretionary sector. Added to the strength in this important market segment is the ongoing National Collegiate Athletic Association (NCAA) Men's Division I Basketball Tournament, which is a money-spinner for media networks (TV, digital and social media), attracting billions of revenues during its course.
If these weren’t enough, the consumer discretionary sector falls under an attractive industry category, as per the March Zacks Report. While apparel is now hot, home furnishing-appliance and other consumer discretionary items are also in demand.
Given sluggish retail sales but a brighter outlook for the broad space, investors can take advantage of the strong trends through the following ETFs. All these funds offers broad exposure to the space and have a solid Zacks ETF Rank of 1 or ‘Strong Buy’ underscoring its potential to outperform in the months ahead (see: all the Consumer Discretionary ETFs here).

Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)

This is the largest and the most popular product in the consumer discretionary space with AUM of $10.5 billion and average daily volume of over 8.3 million shares. It tracks the Consumer Discretionary Select Sector Index and holds 88 securities with higher concentration on the top four firms at 29.7%. From a sector look, media takes the top spot with 24.1% of assets, followed by specialty retail (20.5%), Internet retail (15.3%), and hotels and restaurants (14.5%). The fund charges 14 bps in fees per year and has lost 0.8% so far this year.

First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report)

This follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. This approach results in a basket of 128 stocks that are well spread out across components, with each holding less than 1.8% of assets. Specialty retail is the top sector with nearly one-fourth of the portfolio, closely followed by media (16.5%) and household durables (11.4%). FXD has AUM of more than $1.9 billion and trades in volume of 507,000 shares per day on average. It charges a higher 63 bps in annual fees and has added 0.9% in the year-to-date timeframe.

Vanguard Consumer Discretionary ETF (VCR - Free Report)

This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 380 stocks in its basket with the top firm taking the maximum share at 7.9%. Other firms hold no more than 5.6% of assets. Internet retail, restaurants, cable & satellite, and movies and entertainment are the top four sectors accounting for a double-digit exposure each. VCR is the low choice in the space, charging investors just 10 bps in annual fees while volume is also solid at nearly 170,000 shares a day. The product has managed about $1.8 billion in its asset base so far and has shed 0.9% to date this year  (read: 3 Consumer Discretionary ETFs to Buy Now).
iShares U.S. Consumer Services ETF (IYC - Free Report)

This ETF provides targeted exposure to the domestic consumer services stocks by tracking the Dow Jones U.S. Consumer Services Index. Holding 186 stocks in its basket, the fund is slightly skewed toward the top firm at 7.6% while the other firms hold less than 5.6%. In terms of industrial exposure, retailing makes up the largest share with 35.9%, followed by media (23.1%), consumer services (15.9%), and foods & staples retailing (15.3%). The fund has amassed $988.3 million in its asset base while trades in a moderate volume of 69,000 shares a day on average. It charges 44 bps in annual fees from investors and is down 1.2% in the year-to-date timeframe.

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