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Discretionary Opportunity the Equal-Weight Way


The consumer discretionary sector has taken its lumps this year, which is understandable as it is the worst-performing group in the S&P 500.

With Thursday’s 1.7% loss, the Vanguard Consumer Discretionary ETF (VCR) is now saddled with a slight year-to-date loss. VCR and other market capitalization-weighted discretionary ETFs have been hindered by some of the sectors most familiar names.

Amazon (AMZN) is back in bear market territory while Home Depot (HD), another major component in many discretionary ETFs, is one of the worst-performing stocks in the Dow Jones Industrial Average this year. [Behind the Fall of Discretionary ETFs]

The Guggenheim S&P Equal Weight Consumer Discretionary ETF (RCD) has been a little bit better and still clings to a slight year-to-date gain. Given the struggles of some of the sector’s marquee names, including Amazon, Home Depot and Twenty-First Century Fox (FOXA), an equal-weight approach to discretionary stocks with RCD could be the way to prepare for a rebound by the sector.

“ But diversification is still the #1 priority, so I’d build the base of my cyclical holdings around an equal weight sector ETF like the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF, which has an expense ratio of 0.5% and a broad mix of over 80 holdings. No holding is over 1.5% of the RCD,” according to Capital Cube.

The equal-weight methodology, which has proven rewarding with other sectors, including energy, reduces RCD’s exposure to laggards in a sector rife with such names. [Equal-Weight Works With Energy ETF]

Investors can use RCD in unison with individual discretionary stocks to round out their portfolios’ allocation to the sector. For example, pairing RCD with strong discretionary names such as Time Warner (TWX) or Dow component Walt Disney (DIS) could prove rewarding going forward.

“If I use the RCD to get 2/3 of my total exposure to cyclical stocks, I can supplement my sector weighting with some individual names that I feel will outperform if the U.S. economy delivers the 2-2.5% annual growth that after today seems quite likely to occur,” adds Capital Cube.

RCD’s largest industry allocation is 21.9% to specialty retailers followed by 18.4% to media names. A combined 23% goes to hotel and restaurant and household durable names.

Guggenheim S&P Equal Weight Consumer Discretionary ETF