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Discretionary ETF Investors Could Find Coal This Holiday


Diverging performances in domestic small-cap consumer sectors reveal investors’ darkening outlook on holiday sales and could point to further weakness in broader discretionary exchange traded funds.

The Russell 2000 Consumer Discretionary Index has fallen behind the Russell 2000 Consumer Staples Index by 2 percentage points over the past week, Bloomberg reports.

Steven DeSanctis, Bank of America Corp.’s strategist for small-cap equities, said that the two groups are a “classic trade” for gauging investor expectations on consumption since the companies have “very little overseas exposure” and better reflect American consumption.

Tim Ghriskey, chief investment officer at Solaris Group LLC, argues that the divergence show investors’ pessimism as more are bracing for a modest increase in sales due to a lackluster start to the shopping season.

“The market is telling us sales volumes and margins are becoming more of a concern,” Ghriskey said in the article. “The holiday season may be more disappointing than investors previously thought, especially in the U.S. and particularly for boutique-type retailers.”

Additionally, the decline in discretionary group relative to staples comes after U.S. retailers, like Wal-Mart (WMT), reported weakening outlooks. [Retail ETFs Could Get Coal in Their Stockings]

The two largest ETFs in the consumer discretionary and staples group include the Consumer Discretionary Select Sector SPDR (XLY) and Consumer Staples Select Sector SPDR (XLP) . So far this year, discretionary stocks have outperformed, with XLY gaining 38.9% year-to-date, compared to XLP’s rise of 24.8%.

Potential investors should be aware that the consumer discretionary group also includes hotels, restaurants and auto-related companies, which may not depend on Christmas sales.

Other broad discretionary-related ETFs include:

  • Market Vectors Retail ETF (RTH) : up 38.5% year-to-date
  • Vanguard Consumer Discretionary Index Fund (VCR) : up 39.7% year-to-date
  • First Trust Consumer Discretionary AlphaDEX Fund (FXD) : up 40.1% year-to-date

Other broad consumer staples ETFs include:

  • Vanguard Consumer Staples Index Fund (VDC) : up 26.4% year-to-date
  • First Trust Consumer Staples AlphaDEX Fund (FXG) : up 39.7% year-to-date
  • iShares Dow Jones U. S. Consumer Goods Sector Index Fund (IYK) : up 27.9% year-to-date

For more information on consumer discretionary sector, visit our consumer discretionary category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.