Investors breathed a sigh of relief last week as Congress finally came together—sort of—in order to ‘solve’ the fiscal cliff. Spending cuts were more or less put on the backburner while we saw taxes rise a bit on dividends and high earners, although lower marginal rates remained on middle class and low earners.
Still, taxes do look to rise on most Americans via a different route; the expiration of a payroll tax cut. This Social Security tax break is now disappearing and it means that take home pay is falling by 2% for everyone (at least up the income cap which currently stands around the $110,100 mark).
This means that true middle income households—like those who earn about $50,000 a year—will have to shell out another thousand dollars a year in taxes (read 3 Consumer Staples ETFs for the Shaky Market).
Obviously this isn’t great news for anyone living paycheck to paycheck or even those who were looking to do a bit more saving as this year’s Resolution. The end of the break could also be bad news for companies in the consumer discretionary space as well.
That is because it could result in a marked decrease in the total demand for consumer goods across the board, taking a big chunk of disposable income out of the pockets of millions around the country. With this kind of backdrop, some U.S. focused consumer firms may have a difficult time to start the year, and could reduce their outlooks for the fiscal year once earnings season hits (see Access the $30 trillion Consumer Market with these ETFs).
For this reason, investors should pay close attention to consumer discretionary ETFs in what could be a difficult period, especially when compared to the rest of the market. In particular investors should zero in on the following three popular consumer discretionary ETFs as ones to watch as the full impact from the fiscal cliff deal is known.
Select Sector SPDR Consumer Discretionary ETF (XLY)
This is easily the most popular consumer discretionary ETF on the market, tracking a broad index of firms in industries like retail, apparel, autos, leisure equipment, hotels, and media just to name a few. The portfolio currently consists of about 85 stocks in total and it charges investors 18 basis points a year in fees.
Holdings are skewed towards media firms (31%), although specialty retail and hotels/restaurants round out the top three with each accounting for 15% of the portfolio. Currently, the top holdings are Comcast (CMCSA), Home Depot (HD), and Amazon (AMZN), each of which makes up less than 7% of assets.
Vanguard Consumer Discretionary Index Fund (VCR)
This choice is by far the cheapest in the space, charging investors 14 basis points a year in fees while still having solid levels of volume. VCR also has a wide focus on the consumer market, tracking the MSCI US Investable Market Consumer Discretionary Index, holding a robust 380 stocks in its basket (see Three Low Beta Sector ETFs).
Specialty retail and then media once again dominate the holdings profile of the fund, while there is also a large cap tilt in this ETF as well. Still, exposure is more spread out in this ETF—partially due to the larger number of holdings—as no single security accounts for more than 5% of assets.
First Trust Consumer Discretionary AlphaDEX Fund (FXD)
This First Trust product is the most expensive on the list, charging investors 70 basis points a year in fees, though it still has good volume. The ETF does, however, make up for this by having a more involved index development process, ranking stocks on a variety of growth and value factors instead of just using a pure market cap process (see Two Zacks #1 Ranked Consumer Discretionary ETFs).
This results in a portfolio that has about 125 stocks in its basket, although once again specialty retail and media are the biggest components. The fund does do a great job of spreading out dollars across the various companies though, as not a single stock accounts for more than 2% of assets, suggesting great diversification for the extra fees in FXD.
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