Given improving economic fundamentals and the holiday fervor, the consumer discretionary sector looks like an exciting bet at present. This is because a strengthening economy and better job prospects are supportive of economically sensitive sectors like consumer discretionary, which typically perform well in a maturing economic cycle.
Additionally, a flurry of upbeat economic data suggests a continuation of the bull run at least in the near term in this important market segment.
Encouraging Industry Trends
The job market remains the most progressive area with the longest streak of overall job growth since the financial crisis and unemployment rate dropping to a nine-year low of 4.6%. The U.S. economy continued its strong momentum early in the fourth quarter after growing at its quickest pace in two years in the third quarter. Strong consumer spending, rising confidence and low inflation added to the enthusiasm (read: 4 ETFs to Gain from Healthy Consumer Spending).
This is especially true given that consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated at a solid pace for the second consecutive month in October. Additionally, the recent consumer sentiment surveys were extremely positive as consumer confidence rose to the highest level since July 2007 in November as per the report from the New York-based Conference Board. According to the University of Michigan, consumer sentiment in early December rose to the highest level since January 2015.
Further, President-elect Donald Trump’s expansive stimulus plans and deregulations would drive economic growth and create more jobs in the country. These would in turn instill increased confidence in consumers.
The consumer discretionary sector is expected to gain the most from the holiday shopping season. According to data compiled by the National Retail Federation (NRF), holiday sales – online and in stores – are expected to grow 3.6% for November and December to $655.8 billion. This is higher than the average growth of 2.5% over the past one decade and an average of 3.4% over seven years since the recovery began in 2009.
This indicates that total spending during the holiday shopping season will likely reach $935.58, the second highest level after last year’s record spending of $952.58 (read: 4 Reasons to Buy Retail ETFs This Holiday Season).
Top Ranked Consumer ETF in Focus
In view of the reasons discussed above, we strongly believe that investors should consider consumer discretionary ETFs. For them, we have found a number of ETFs that have the top Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) in the broad consumer discretionary space and are thus expected to outperform in the months to come (read: all the Top Ranked ETFs).
In fact, we have highlighted five ETFs that recently surged to top ranks in the latest rating upgrade. These funds are enjoying a strong momentum and have potentially superior weighting methodologies that could allow these to continue leading the consumer space in the months ahead.
The Restaurant ETF
This ETF follows the BITE Index and offers exposure to 41 renowned companies in the restaurant industry that operates a broad variety of restaurant formats ranging from quick serve and fast casual to casual dining and fine dining. It has an expense ratio of 0.75% and has accumulated nearly $1.4 million in its asset base. The fund trades in a small volume of about 2,000 shares and gained 6.5% over the past one month. It was upgraded from a Zacks ETF Rank of 5 (Strong Sell) to a Rank of 2 (read: BITE vs MENU : Will the War Whet ETF Investors' Appetite?).
S&P SmallCap Consumer Discretionary Portfolio (PSCD - Free Report)
The fund follows the S&P SmallCap 600 Capped Consumer Discretionary Index. It holds 109 securities in its basket that are well spread out across components as each security holds less than 2.6% of the assets. Within the consumer discretionary sector, specialty retail takes the top spot at 29.7% of the total, followed by double-digit allocations to hotel and restaurants, auto components, and household durables. The product has attracted $86.3 million in AUM while sees light volume of just 6,000 shares per day. The ETF charges 29 bps in annual fees and expenses, and returned 6% in the trailing one-month period. PSCD was upgraded to Zacks ETF Rank to 2 from 4 (Sell).
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 $11.3 billion and average daily volume of over 5.5 million shares. It tracks the Consumer Discretionary Select Sector Index and holds 88 securities with higher concentration on the top firm. Other firms make up for a nice mix with each holding less than 7% of assets. From a sector look, media takes the top spot with 24.9% of assets, followed by specialty retail (20.4%), Internet retail (18.8%), and hotels and restaurants (13.1%). The fund charges 14 bps in fees per year and added 4.7% over the past one month. It saw its Zacks ETF Rank surging to 1 from 3 (Hold) (read: Trump Effect Elevated These Sector ETFs to Rank #1).
PowerShares Dynamic Leisure and Entertainment Fund (PEJ - Free Report)
This fund tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 30 US leisure and entertainment companies. It is pretty well spread out across components with each holding less than 5.3% share. From an industrial look, about one-fourth of the portfolio is dominated by airlines while restaurants, movies & entertainment, hotels & leisure facilities, and casinos & gaming round off the next four spots. The ETF has amassed $154.5 million in its asset base and trades in light volume of 38,000 shares a day on average. Expense ratio came in at 0.61%. PEJ is up 4.3% over the past one-month and saw its Zacks ETF Rank surging to 2 from 5.
PowerShares Retail Fund (PMR - Free Report)
This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with none holding more than 5.3% of assets. In terms of industrial exposure, specialty retail takes half of the portfolio while food retail (16%), drug stores (10%) and departmental stores (10%) round off the top three positions. The fund has accumulated just $22.8 million in its asset base and charges 63 bps in fees per year. It gained 3.8% over the past one month and saw its Zacks ETF Rank being upgraded to 2 from 4.
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