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Strength in Consumer Sector ETFs May Be Misleading


The strength in retail and consumer sector exchange traded funds belie the growing pessimism among Corporate America.

Retail and consumer sector ETFs, such as the SPDR S&P Retail ETF (XRT) and Consumer Discretionary Select Sector SPDR (XLY) , along with the broader equities market, are reaching new highs and are attracting robust inflows, with XLY bringing in over $1 billion in assets over the past month. [Discretionary ETFs on the Comeback Trail]

The U.S. economy expanded a better-than-expected 4.2% over the second quarter while consumer spending was up 2.5% over the three month period, contributing to a 1.7 percentage point GDP gain, CNBC reports.

Nevertheless, retailers are less sanguine about the prospects for U.S. consumption, with companies warning about a “challenged” state of the U.S. consumer.

“In North America, the overall retail environment in our category remained challenging, with soft traffic and permanent promotion in a retail environment throughout most of the second quarter,” Paul Marciano, vice chairman and CEO of Guess’ Inc. (GES), said.

Notably, low- and middle-income consumers are still struggling and have changed their buying habits. Many retailers are seeing a significant drop in purchases among low-income areas.

“Data now suggest that out of necessity, many folks have reduced their overall consumption, and absolute unit growth across Nielsen-measured channel data supports this,” Richard Dreiling, chairman and CEO of Dollar General (DG), said.

“I don’t think we have anything to add to that other than I think that that customer is challenged economically and finding this environment difficult,” Michael B. O’Sullivan, president and chief operating officer of Ross Store (ROST), said.

Looking at XRT’s holdings, GES makes up 0.9% of the portfolio, DG is 1.0% and ROSt accounts for 1.1%.

Additionally, the consumer staples sector has not been immune to the changing consumer habits.

“The North American consumer picture continues to be weak, with retail sales among the top 30 food and beverage manufacturers roughly flat in the quarter,” PepsiCo (PEP) CEO Indra Nooyi said.

The Consumer Staples Select Sector SPDR (XLP) , which has a 4.8% weight toward PEP, is up 6.2% year-to-date. [Defensive Posturing Seen Amid Big Buying of Staples ETF]

For more information on the retail sector, visit our retail 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.