The performance of consumer discretionary ETFs is a referendum on consumer sentiment. Consumer Discretionary ETFs are funds that hold highly cyclical companies, sensitive to consumer mood. These ETFs are leading indicators of market direction. Where are they headed?The chart below compares the performance of a benchmark discretionary fund, the Consumer Discretionary Select Sector SPDR (NYSEArca:XLY - News) with a consumer staples benchmark ETF, the Consumer Staples Select Sector SPDR (NYSEArca:XLP - News). Consumer discretionary ETFs are often compared to Consumer Staples ETFs. Consumer Discretionary ETFs hold companies that sell non-necessities. Leading ETF holdings include retailers like Amazon and Home Depot and entertainment providers like DirectTV and Comcast.The good news for discretionary bulls is that consumer sentiment seems to be gradually improving. One key indicator is the University of Michigan Consumer Survey. In May 2011 the index registered 74.3. This was up from April 2011, but still below the 90 level economists associate with a stable economy.Credit is an important consideration. According to Federal Reserve statistics, after contracting in 2009 and 2010, overall credit has increased every month in 2011. This suggests stabilization. But the all-important revolving credit continues to contract. Revolving credit contracted in the first quarter of 2011 at an annual rate of 4.8%Staples are the other half of the consumer equation. Staples are products deemed necessary and non-discretionary. Companies include makers of household products like Proctor and Gamble, cigarette companies Altria and Phillip Morris, and beverage giant Coke.Over the one year period shown in the chart above, consumer discretionary ETF XLY has par-performed the Staples fund XLP. Consumer discretionary tends to outperform when consumers feel confident. Staples outperform when consumers save money and stick to the basics. The chart above seeks to provide a rough snapshot of consumption patterns from an investment perspective. The par-performance of XLY and XLP indicated by the chart hints at a relatively stable and balanced situation, whereby neither discretionary nor staples have had advantage.Of course, the dividend component for discretionary and staples is not identical. A discretionary fund like XLY typically has slightly lower dividends then a staples fund like XLP, right now this is about 1%. Investors may take a small difference in dividends to be more important when interest rates are low, as they are now, helping to boost the price of staples ETFs.Over the longer term, performance has been less stable than indicated by the chart above. The chart below compares the same two ETFs, but over a 5-year period. As the chart shows, consumer discretionary fell sharply in the summer of 2007, as the economy faltered and consumers cut back. Staples outperformance accelerated into the bottom of the market in 2009. Consumer Discretionary fund XLY bounced back sharper and faster than Staples XLP off the 2009 lows. The chart shows that investors have not recovered their pre-2007 confidence in the consumer.There are some signs that consumer patterns may have changed fundamentally, at least over the mid-term. According the Department of Commerce's Bureau of Economic Analysis, a percentage of disposable income, personal savings is currently running above 5% (as opposed to about 2% before the mortgage crisis).Judging by the tight relationship of discretionary and staples in the first chart above, valuations seem to have adjusted to these new levels. Currently P/E ratios of XLY and XLP are similar, and are similar to the broad market. Consumer Discretionary XLY has a P/E ratio of 16, compared to 15 for XLP and 14 for the SPDR S&P 500 Index (NYSEArca:SPY - News). But if the economy improves, investors will likely return to favoring the discretionary sector as they did prior to 2007.A good choice for many investors interested in the consumer discretionary sector is the Vanguard Consumer Discretionary ETF (NYSEArca:VCR - News). VCR tracks the MSCI U.S. Investable Market Consumer Discretionary index. This index is pretty broad, combining service and manufacturing-- automotive, household durables, textiles, hotels, restaurants and leisure offerings.In addition to broad consumer discretionary funds like XLY and VCR, the stable of consumer discretionary ETFs includes several funds specialized in specific sub-sector markets. Barclays, for example, divides consumer discretionary into goods and services. The chart compares the 1-year performance between iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NTSEArca:IYK) and iShares Dow JonesU.S. Consumer Services Sector Index Fund (NYSEArca:IYC - News).There are also several Proshares ETFs popular with traders. They are different from the plain vanilla consumer discretionary ETFs because they all use leverage and have much higher expense ratios. Long funds: ProShares Ultra Consumer Goods (NYSEArca:UGE - News) and ProShares Ultra Consumer Services (NYSEArca:UCC - News). Short funds are ProShares UltraShort Consumer Goods (NYSEArca:SZK - News) and ProShares UltraShort Consumer Services (NYSEArca:SCC - News).Following are a list of popular consumer discretionary ETFs:Broad Consumer DiscretionaryConsumer Discretionary Select Sector SPDR (NYSEArca:XLY - News)Vanguard Consumer Discretionary VIPERS (NYSEArca:VCR - News)Sub-Sector Consumer Discretionary:iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NYSEArca:IYK - News)iShares Dow Jones U.S. Consumer Services Sector Index Fund (NYSEArca:IYC - News)SPDR S&P Retail ETF (NYSEArca:XRT - News)PowerShares S&P SmallCap Consumer Discretionary (NYSEArca:PSCD - News)Powershares Dynamic Retail Portfolio ETF (NYSEArca:PMR - News)PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEArca:PEJ - News)PowerShares Dynamic Media Portfolio (NYSEArca:PBS - News)PowerShares Dynamic Retail Portfolio (NYSEArca:PMR - News)International Consumer DiscretionaryGlobal X China Consumer ETF (NYSEArca:CHIQ - News)iShares Global Consumer Discretionary (NYSEArca:RXI - News)Fundamental Consumer DiscretionaryPowerShares Dynamic Consumer Discretionary (NYSEArca:PEZ - News)First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca:FXD - News)Rydex S&P Equal Weight Consumer Discretionary (NYSEArca:RCD - News)Short and Leverage Consumer DiscretionaryProShares Ultra Consumer Goods (NYSEArca:UGE - News)ProShares Ultra Consumer Services (NYSEArca:UCC - News)ProShares UltraShort Consumer Goods (NYSEArca:SZK - News)ProShares UltraShort Consumer Services (NYSEArca:SCC - News)Jonathan Bernstein has been writing about ETFs since 2003 and is the author of Sector Trading: A Year in Exchange Traded Funds.