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Discretionary ETFs: Attractive on Valuation


Following a weak holiday shopping season, coupled with winter snow storms, weighed on retail names, the consumer discretionary sector, along with related exchange traded funds, is one of the most attractively priced U.S. equity sectors.

“With its recent pullback, the consumer discretionary sector is, according to our fair value estimate, more attractively priced on a relative valuation basis than any U.S. equity sector, other than the energy sector,” writes Morningstar fund analyst Robert Goldsborough.

The consumer discretionary sector is showing signs of life. Consumer confidence is rising and touched its highest level in six years as of March. Additionally, the sector may find support from a strengthening stock market, recovering housing market and improving job market.

The recent decline in the discretionary sector is attributed to the poor holiday season, the worst for retail since 2009, and the crippling winter weather that kept shoppers from leaving the comfort of their homes. [The Discreet Decline of Discretionary ETFs]

“Because of these recent headwinds, the consumer discretionary sector is relatively undervalued right now,” Goldsborough said. “It strikes us that some fairly short-term dynamics are pressuring a good number of consumer discretionary names, and we could see a number of those reversing (or at least ceasing to be drags) as 2014 progresses.”

Investors can take a look at ETFs to capture the relatively cheap consumer discretionary sector. For instance, the Vanguard Consumer Discretionary ETF (VCR) trakcs 374 companies, with about one third of its holdings allocated to retail names, followed by 27% in media and entertainment companies. VCR is down 0.7 year-to-date and has a 0.14% expense ratio. [ETF Chart of the Day: Media]

The Consumer Discretionary Select Sector SPDR (XLY) follows a more narrow group of 84 companies with similar sector weights as VCR. XLY has a 0.16% expense ratio and is down 1.5% year-to-date.

Additionally, the iShares Global Consumer Discretionary ETF (RXI) provides a more diversified global focus, but the fund’s top four of ten holdings include automotive names. RXI is down 1.3% year-to-date and has a 0.48% expense ratio.

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