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Will Consumer Discretionary ETFs Suffer the Coronavirus Blow?

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The coronavirus death toll in China is rising at an alarming rate. The number of deceased has risen to 106 in the world’s second-largest economy. Moreover, the total number of confirmed cases has risen to more than 4,000 across China. Along with locking down transports in its several cities, the China government has ordered a shutdown of the most visited section of the Great Wall and other famous cultural tourist sites in hopes of containing the outbreak.

Going on, the coronavirus outbreak has happened during the Lunar New Year holidays in China, a time when a large chunk of people move out either for holidays or visit their families in China from abroad. In fact, there was a 28.8% year-over-year decline in travels on the first day of the Lunar New Year. The coronavirus outbreak is expected to have an impact on the consumer discretionary sector, which attracts a major portion of consumer spending (read: 5 ETFs to Protect Your Portfolio From Coronavirus Threat).

Impact on US Consumer Discretionary Sector

Major retailers, restaurants and hotels in the United States, which earn a large portion of revenues from operations in China, are expected to suffer huge blows. Some of these companies have been asked to remain closed with the outbreak getting severe. For instance, global brands like Estee Lauder (EL - Free Report) and Nike NKE generate around 17% of their revenues  from mainland China annually. Per Credit Suisse, if the coronavirus outbreak intensifies, these companies might face a 3% to 5% decline in earnings per share in the next quarter. In fact, the most popular consumer discretionary ETF Consumer Discretionary Select Sector SPDR Fund XLY has already lost 3.1% in the past seven days (since Jan 21) (read: Can China ETFs Survive the Coronavirus Onslaught?).

As discussed, forced shut downs and travel restrictions can hugely impact the U.S. hotel and restaurant chains with wide exposure to China. Hotel groups like Marriott MAR, Hilton HLT and Hyatt Hotels H have seen more than 6% decline in their stock prices over the past five trading sessions. In fact, Marriott derived $260 million or 7.5% of total fees from China in 2019. Casino stocks are also suffering as tourist visits to Macao fell 60% year over year through the third day of the Lunar New Year holiday (per Deutsche Bank). Major players like Wynn Resorts WYNN, Las Vegas Sands LVS) and MGM Resorts International MGM are also facing the heat (read: Don't Panic About Virus, Buy 5 Beaten-Down Top-Ranked ETFs).

Among restaurants, the coffee giant Starbucks SBUX derives around 10% of sales and up to 15% of its operating income from China. McDonald’s MCD, with around 3300 units in China and Dominos, also have huge exposure to China.

ETFs That Might Suffer

Below, we have highlighted the five most popular ones that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

Consumer Discretionary Select Sector SPDR Fund XLY

This is the largest and most popular product in the consumer discretionary space, with AUM of $15.84 billion and average daily volume of around 3.6 million shares. It tracks the Consumer Discretionary Select Sector Index, holding 64 securities in its basket. From a sector look, Internet & direct marketing retail takes the top spot with 28.6% of assets, followed by specialty retail (25.5%), and hotels restaurants & leisure (21.1%). The fund charges 13 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 10 Top-Performing ETFs of the Past Decade).

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index and holds 297 stocks in its basket. Internet & Direct Marketing Retail takes the largest share at 28.6%, while restaurants and home improvement retail round off the next two spots. VCR charges investors 10 bps in annual fees, while volume is moderate at nearly 62,000 shares a day. The product has managed about $3.13 billion in its asset base and carries a Zacks ETF Rank #2 with a Medium risk outlook (read: 5 ETFs From Top Industries That Won't Let You Down in 2020).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 286 stocks in its basket. The product has amassed $769.8 million in its asset base, while trading in good volumes of around 78,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index. This approach results in a basket of 119 stocks. FXD has AUM of $307.1 million and trades in volume of 76,000 shares per day on average. It charges 64 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)

This ETF offers equal weight exposure to companies in the consumer discretionary sector by tracking the S&P 500 Equal Weight Consumer Discretionary Index. It holds 64 securities in the basket. The product has amassed $99.5 million in its asset base and charges 40 bps in annual fees. It has a Zacks ETF Rank #3 with a Medium risk outlook.

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