Since Oct. 4, 2011, U.S. equities have pushed sharply higher,
Tuesday's bath notwithstanding.
If a rallying market signals an expanding economy, consumer
cyclical sector ETFs should be the train to ride. There's only one
problem. This time the recovery lacks the key driver for consumer
cyclicals to take off, namely paychecks.
This may explain why consumer cyclicals have barely beaten broad
equities since Oct. 4.
As a proxy for the segment, I chose the largest consumer
cyclical ETFs by assets:the Consumer Discretionary Select Sector
SPDR Fund (NYSEArca:XLY).
To represent the broad U.S. equity market, I used the SPDR
S&P 500 (NYSEArca:SPY).
With returns of 25.5 percent, XLY beat SPY, but not by much. SPY
jumped an impressive 23.4 percent during that same period, from
Oct. 4 through March 1.
What's more, four other sectors beat consumer cyclical stocks
during the same period. I used other SPDR sector ETFs as
Big inflows into these funds suggest that smart money thinks the
sector is primed to take off. But why?
Maybe investors are looking for returns from something other
than Apple. The tech juggernaut delivered an incredible 46 percent
total return from Oct. 4 to March 1. But if you own the S&P
500, you've already got 4 percent in Apple stock and perhaps want
to look for another growth engine.
Or maybe the investors behind the net flows into consumer
cyclicals think that honest-to-goodness hiring and wage growth are
near at hand, and with it, more discretionary spending.
Or, perhaps they think that, at minimum, U.S. consumers-feeling
more confident, if not truly richer-will release pent-up demand
after keeping their wallets closed over the past three or four
The four largest funds in the consumer cyclical sector hold what
they call either "consumer discretionary" stocks or "consumer
services" stocks. While stocks in these groups certainly overlap,
large differences exist right at the top of the holdings list.
For example, XLY, a consumer discretionary fund, holds Ford
Motor Co. But the iShares Dow Jones U.S. Consumer Services Index
Fund (NYSEArca:IYC) doesn't. It holds Walmart instead.
Differing stock universes aside, the funds' selection and
weighting processes play a huge role too. The second-largest
consumer cyclicals fund by assets is First Trust's Consumer
discretionary AlphaDex Fund (NYSEArca:FXD), which selects and
weights stocks with a multifactor model rather than the usual
These differences in the stock universe and in selection and
weighting processes help explain some of the performance
Here's a peek at the performance of these same four-largest
consumer cyclicals funds in the 12 months ended March 1.
As it happens, a three-year look-back coincides closely with the
bottom point of the broad market following the financial
FXD has screamed back from this low point, albeit with a wild
ride along the way. That's consistent with the idea that FXD has
higher beta than its peers.
Conversely, both charts suggest IYC has lower beta than other
To be clear, I expect all four of these consumer cyclical funds
to have higher beta than SPY. The point is that each fund parks
itself on a different part of the risk/return spectrum.
These funds diverge on fees as well, with FXD charging the most
by far at 0.70 percent and IYC next highest at 0.47 percent. XLY
and VCR are far cheaper at 0.18 percent and 0.19 percent,
So, if you're inclined to follow the money, or if you believe
the economy really is growing and don't want more Apple in your
cart, consumer cyclical ETFs offer a viable alternative.
Of the four funds I touched on here, I happen to like XLY for
its low cost and middle-of-the-road risk level, relatively
speaking. For a list of all eight funds in the sector, use our
IndexUniverse ECS fund finder.
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