Specialized ETFs that focus on discretionary sectors are poised to benefit from higher consumer spending if U.S. employment data continues to improve, analysts say.
“With the economy appearing to be in recovery as stronger than expected jobs numbers keep coming in each month, some investors might be inclined to bet on improved consumer spending,” writes Joel Anderson at Equities.com.
“If the economy is in recovery, one sector that should stand to benefit the most is consumer discretionary. More jobs and increased income should mean increased disposable income for a great many Americans, and that could mean that the consumer discretionary sector on the whole, could be on the rise,” he adds.
Discretionary income is whatever consumers have left over after shelling out for life’s necessities such as food and shelter, and includes cash spent on luxury items.
Anderson points to several ETFs that should profit from rising consumer spending: Global X Auto (NYSEArca: VROM), Market Vectors Gaming (NYSEArca: BJK), PowerShares Dynamic Leisure & Entertainment (NYSEArca: PEJ), SPDR S&P Retail (NYSEArca: XRT), Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) and other consumer discretionary funds.
For example, Vanguard Consumer Discretionary (NYSEArca: VCR) is “a cyclical exchange-traded fund that represents a low-cost way to gain exposure to domestic firms that largely rely on discretionary consumer spending to drive their businesses,” says Morningstar analyst Robert Goldsborough.
“This fund should be treated as a satellite holding by investors looking to bulk up their exposure to the consumer. As with any investment decision, before pulling the trigger, however, we’d urge investors to consider the macroeconomic climate,” he says in an analyst report on the ETF. “With more than two thirds of economic activity fueled by consumer spending, it would be a prudent move to examine the economic backdrop before making a bet on the health of the consumer.”
Consumer Discretionary Select Sector SPDR
Full disclosure: Tom Lydon’s clients own XRT.