look pricey. The discretionary sector had a strong run in 2009
and the first half of 2010. Now, consumer staples are cheaper.
Broad market benchmarks like the S&P 500 are cheaper. Recent
consumer data does not seem to bear out this confidence.
Consumer sentiment is off. June consumer sentiment came in at
50.4. This was twice as good as in March of 2009, but way below
the 90 level economists associate with a stable economy.
Consumers are also economizing. According the Department of
Commerce's Bureau of Economic Analysis, a percentage of
disposable income, personal savings is currently running above 6%
(as opposed to about 2% before the mortgage crisis).
Very negative consumer sentiment is important for the
discretionary sector. When sentiment is strong, consumers tend to
be willing to spend on discretionary products and services. When
sentiment is weak, consumers cut back on discretionary
Credit is an important consideration too. According to Federal
Reserve statistics, overall revolving credit decreased at an
annual rate of 9.5% in the second quarter of 2010. Federal
Reserve numbers have consumer credit contracting 16 of the past
The chart below compares the Consumer Discretionary Sector
SPDR (NYSEArca:XLY), the Consumer Staples Select Sector SPDR
(NYSEArca:XLP). Through April discretionary led staples by
Performance in the consumer discretionary is often compared
with performance in the consumer staples sector. The chart shows
XLYs extraordinary run over the last 12 months. XLY is the
benchmark consumer discretionary ETF. It holds automobile,
restaurant, hotel and entertainment stocks. XLP holds companies
producing staples. Staples are goods and services deemed
essential to consumers.The chart shows that XLY is sensitive to
consumer and investor sentiment and the market cycle broadly.
At current levels, XLY has a Price/Earnings ratio of 17 as
compared to 14 for XLP, and 15 for the S&P 500. This means
that discretionary companies like Comcast, Disney and Home Depot
are priced higher in terms of their earnings compared to staples
companies like Coke, Pepsi and Walmart.
One reason for this pricing is the relative popularity of the
risk trade coming off the bottom of the market in March of 2009.
During this period investors bought staples and shunned all
An historically volatile sub-sector of consumer discretionary
is retail. SPDR S&P Retail ETF (NYSEArca:XRT) holds companies
like Dicks Sporting Goods, the Dress Barn, and Footlocker.
Traders may find it useful to focus a consumer discretionary
position by mixing in a long or short position in XRT.
There are also several Proshares ETFs popular with traders.
They are different from the plain vanilla consumer discretionary
ETFs in several ways. First, all use leverage-- used either in
going long the sector: ProShares Ultra Consumer Goods
(NYSEArca:UGE) and ProShares Ultra Consumer Services
(NYSEArca:UCC, or to short it: ProShares UltraShort Consumer
Goods (NYSEArca:SZK) and ProShares UltraShort Consumer Services
(NYSEArca:SCC). Second, these funds are expensive, with expense
ratios of 0.95% compared to 0.23% for XLY. Third, these funds
tend to shrink and grow in size according to popularity and
market direction far more dramatically than other consumer
discretionary ETFs. All are probably too speculative and
expensive for most investors.
A list of consumer discretionary ETFs follows:
Broad Consumer Discretionary
Consumer Discretionary Select Sector SPDR (NYSEArca:XLY)
Vanguard Consumer Discretionary VIPERS (NYSEArca:VCR)
Sub-Sector Consumer Discretionary
iShares Dow Jones U.S. Consumer Goods Sector Index Fund
iShares Dow Jones U.S. Consumer Services Sector Index Fund
SPDR S&P Retail ETF (NYSEArca:XRT)
PowerShares S&P SmallCap Consumer Discretionary
Powershares Dynamic Retail Portfolio ETF (NYSEArca:PMR)
PowerShares Dynamic Leisure & Entertainment Portfolio
PowerShares Dynamic Media Portfolio (NYSEArca:PBS)
PowerShares Dynamic Retail Portfolio (NYSEArca:PMR)
PowerShares Dynamic Telecommunications & Wireless
International Consumer Discretionary
Global X China Consumer ETF (NYSEArca:CHIQ)
iShares Global Consumer Discretionary (NYSEArca:RXI)
Fundamental Consumer Discretionary
PowerShares Dynamic Consumer Discretionary (NYSEArca:PEZ)
First Trust Consumer Discretionary AlphaDEX Fund
Rydex S&P Equal Weight Consumer Discretionary
Short and Leverage Consumer Discretionary
ProShares Ultra Consumer Goods (NYSEArca:UGE)
ProShares Ultra Consumer Services (NYSEArca:UCC)
ProShares UltraShort Consumer Goods (NYSEArca:SZK)
ProShares UltraShort Consumer Services (NYSEArca:SCC)
has been writing about ETFs since 2003 and is the author of
Sector Trading: A Year in Exchange Traded