Consumer confidence in November rose to a new high suggesting to many that we finally be out of the woods on this front. The rise in consumer confidence is a good indicator of broad spending heading into the holiday season and could also imply that shoppers will open up their pocketbooks this year once more (Spending is Surging: Stock Up on These ETFs).
The upcoming holiday sales season is expected to be rewarding for retailers as consumer sentiment remains positive, unemployment rates moderate, and home prices continue to rise.
Given this, a look to the consumer space could be in order, especially if markets are rising since this is traditionally a higher beta sector. With increasing income and employment, consumers tend to spend more on traveling, hotels and restaurants, cars and luxurious electronics and other discretionary items.
Investors should note that within the consumer discretionary industry, sectors which have reported strong gains so far this year are cable & satellite, household appliances and Internet retail. On the other hand are sectors like auto parts & equipment, casino & gaming, footwear and restaurants failed to register growth this year, so a broader ETF look at the space could be the way to go.
For investors that believe this might be the case, we have selected a few of our favorite consumer-focused ETFs this holiday season. Any of the three could make for interesting plays in today’s environment, especially if consumer confidence and spending continues to rise as we close out the year:
Consumer Discretionary Select Sector SPDR Fund (XLY)
Consumer Discretionary Select Sector SPDR Fund is by far the most popular fund in the space tracking the S&P Consumer Discretionary Select Sector Index. The fund is rich in AUM managing an asset base of $3,738.8 million while volume is great as well, trading more than 5.3 million shares a day on average.
The fund invests its asset base in a portfolio of 82 stocks which are mostly large caps with a very small portion allocated to mid and small cap stocks. Also, it is a moderately concentrated fund with more than 45% of the asset base in the top ten holdings.
Among individual holdings, Comcast Corp takes the top spot in the fund with a 6.81% share while Home Depot and Amazon occupy the second and third position with asset allocation of 6.69% and 6.27%, respectively.
Among segments within consumer discretionary, media, specialty retail and hotels restaurants & leisure get double-digit allocations in the fund while among others the fund does not invest more than 9.58%.
The fund also appears to be pretty reasonable from a cost perspective as it just charges a fee of 18 basis points and generates a yield of 1.42% in the process. The fund delivered a return of 19.9% over a period of one year.
First Trust Consumer Discretionary AlphaDEX Fund (FXD)
Another targeted play in the consumer space is First Trust Consumer Discretionary AlphaDEX Fund. This fund represents a more ‘active’ approach to ETF investing, which employs the AlphaDEX methodology. This indexing method ranks stocks on growth and value factors in order to determine weightings as opposed to the more traditional pure market cap technique.
This approach produces a fund with total holdings of 125 stocks, assets under management of $519.2 million, and a trading volume of more than 60,000 shares per day (Guide to the 25 Most Liquid ETFs).
Currently, the fund has the most exposure to mid cap and large cap securities with a very small portion invested in small caps. From an individual security perspective, the fund is pretty well spread out with the top 10 holdings making up just 15.4% of the total assets.
Top holdings include GameStop Corporation, Dillard’s, Inc and LKQ Corporation. The fund charges a hefty expense ratio of 70 basis points. Nonetheless, the fund has performed well in the past one year, delivering a return of 8.58%.
Given the promising trends for cyclical stocks at this time, some investors may want to consider buying into this consumer discretionary ETF for the short term. If the economy continues to rebound, we could see further gains in the space making this a potentially good time to get into this surging sector.
Market Vectors Retail ETF (RTH)
To directly target a recovery, a look towards retail stocks could be the way to go. The sector can be a big beneficiary of a broad recovery and can be one of the first sectors to jump higher when consumer confidence is rising.
To play this trend, investors can aim for the Market Vectors’ RTH which targets the Market Vectors U.S. Listed Retail 25 Index. The fund has a shallow portfolio comprised of 26 securities with approximately 68.5% exposure to the top ten holdings. This exposure is more focused on large cap and mid cap companies, with giant caps taking up most of the spots.
The fund trades with a volume of 73,800 shares a day, and has assets under management of $21.2 million. RTH charges an expense ratio of 35 basis points annually, making it a relatively low-cost choice in the space.
Among individual holdings, Wal-Mart occupies the top position in the fund at just over 13% of the total (Lower Wal-Mart Exposure with These Consumer ETFs). RTH does, however, offer a significant amount of exposure to the online retail behemoth, Amazon, Inc, giving the fund a decent exposure to e-commerce as well.
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