Consumer-Cyclical ETFs Hot Like Jobs Data

Cinthia Murphy
July 5, 2013


Never mind that the better-than-expected June jobs report is causing the bond market to crumble—on the other side of the spectrum are “consumer cyclical” ETFs that, by holding companies like Ford, Disney and Walmart, target the very parts of the economy that are thriving.

The latest Labor Department jobs report showing the U.S. economy created an above-expectations 195,000 new jobs in June wasn’t good for the bond market. Yields on 10-year Treasury notes spiked to two-year highs, reflecting changing expectations on interest-rate policy.

But a strengthening economy would likely suggest that the era of Federal Reserve-fueled easy money policies is coming to an end, boding well for ETFs that tap into the consumer space, even if those funds can serve up very different exposure from one another.

Funds like the Consumer Discretionary SPDR (XLY) and the SPDR S'P Retail ETF (XRT), for instance, have been outperforming the S'P 500 year-to-date, with gains of 20.4 percent and nearly 25 percent, respectively. The SPDR S'P 500 (SPY), meanwhile, is up 13.5 percent in the same period.

That momentum is likely to continue as these “economically sensitive” securities in these portfolios gain as the economy strengthens, S'P Capital IQ Director of ETF Research Todd Rosenbluth told IndexUniverse.

“Lots of subindustries in consumer segments should do well, and these ETFs give investors exposure with diversification,” Rosenbluth said of the segment.

“Consumer cyclicals should fare well when U.S. households feel more confident to open up their wallets for discretionary spending,” IndexUniverse’s ETF analyst Paul Britt added. “However, employment growth has lagged in this recovery, which makes this much less of a slam dunk.”

Many Choices In a Hot Area

At least 20 funds on the market fit the bill, including the Vanguard Consumer Discretionary ETF (VCR), the iShares Dow Jones U.S. Consumer Services Index Fund (IYC) and the Market Vectors Retail ETF (RTH).

State Street’s XLY, which tilts away from retailers and focuses more on information technology services and software companies picked from the universe of the S'P 500, has rallied 3.8 percent in the past five days alone amid net inflows of roughly $100 million.

Since the beginning of the year, XLY has attracted more than $1.5 billion in new assets and now boasts more than $5.73 billion in total assets under management.


It’s worth noting that consumer discretionary funds such as XLY and VCR carve up the consumer space differently than, say, consumer services ETFs such as IYC, which holds giant retailers such as Walmart but excludes auto stocks. That’s to say that it’s up to the investor to make sure the fund chosen taps into the segment desired, Britt noted.

XRT, for instance, is what Britt called an industry-level rather than sector-level stock, and tracks an equal-weighted index comprising stocks from the broader S'P Total Market Index. The fund has nearly doubled its assets this year, having raked in since Jan. 1 a net of $465 million, pushing the fund’s total assets to $1.16 billion.

XRT assigns essentially the same allocation to big names such as Walmart as it does to smaller apparel and retail firms, giving investors access to several small and micro-cap names.

Homebuilders Lag On Interest Rate Sensitivity

While the unemployment rate was unchanged at 7.6 percent on Friday’s report, the job numbers were also upwardly revised for both May and April, and the latest report showed that professional services, as well as bars, hotels and restaurants, were the biggest generators of new jobs in June, according to MarketWatch.

Manufacturing, meanwhile, as well as the government, trimmed jobs last month.

The data helped push yields on 10-year Treasurys to 2.7 percent, a two-year high, because investors are growing concerned that the Fed’s massive bond purchases will soon end, putting pressure on bond prices, as interest rates will likely rise.

That interest-rate risk is what has kept homebuilder ETFs—also considered cyclical stocks—out of the loop in the recent gains, because unlike funds like XLY and IYC, homebuilder stocks may be sensitive to rising interest rates.

The iShares Dow Jones U.S. Home Construction Index Fund (ITB) has slid 1.3 percent this week, and is up only 2.8 percent year-to-date. The SPDR S'P Homebuilders ETF (XHB), too, is lagging the S'P 500, with year-to-date gains of just 9.7 percent.

Since the Fed alluded to its plans to scale back its program on May 22, the S'P 500 has slid 2.8 percent from a high of 1,669.16 that day to around 1,621 today.


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