Exchange traded funds tracking consumer discretionary stocks
have been impressive performers this year.
The Consumer Discretionary Select Sector SPDR (NYSE:
) highlights as much as that ETF is the third-best performer of
the nine sector SPDR funds this year. XLY trails only its health
care and financial services equivalents.
Over the past three years, however, XLY stands as the only
somewhat risky SPDR
that has outpaced lower beta fare such as the staples and health
care funds. Other discretionary funds have been stellar
performers as well.
For example, the iShares U.S. Consumer Services ETF (NYSE:
) and the Vanguard Consumer Discretionary ETF (NYSE:
) are up an average of 25 percent year-to-date.
It is trailing performances like those that could be signs
that investors looking to grab discretionary sector exposure will
pay up for the privilege. Russ Koesterich, global chief
investment strategist for iShares, says some recent economic
trends show the discretionary sector is richly valued.
"The shifting nature of the job market and weak income growth
are also significant headwinds facing US consumption," said
on the BlackRock blog
. "In June, higher mortgage rates seemed to take some of the wind
out of the housing market's sales. If this were to continue, it
would remove one of the big props holding up the US consumer. As
such, consumer-related companies continue to look expensive."
Koesterich also points out that the price-to-book ratio of
discretionary stocks compared to the S&P 500 is high,
currently around 1.7. Three years ago,
the ratio was 1.2
and at 1.7 today, that is nearly double what was seen during some
of the boom times of the mid-1990s.
Causes For Concern With Discretionary Stocks,
"And as of last Friday, US consumer discretionary companies
traded at nearly 4x book value about a 70% premium to the broader
market. In other words, investors are currently paying a big
premium for retailers and restaurants at a time when consumers
are still struggling and spending remains weak," said
Rich valuations are seen with
as well. XLY's P/E ratio is close to 19 with a price-to-book
ratio of 3.8. Those numbers for IYC are 20.8 and 5.3, though in
the case of IYC, its valuations are inflated by its exposure to
staples names such as Wal-Mart (NYSE:
It is easy to see why some discretionary ETFs are richly
valued. Amazon.com (NASDAQ:
) wit a forward P/E of almost 97, is a top-10 holding in both IYC
and XLY. After soaring 26.5 percent this year, Home Depot (NYSE:
) now looks frothy at over 18 times next year's estimated
Caution could be warranted going forward with discretionary
ETFs because the sector, as Koesterich notes, could be
"discounting too much optimism."
For more on ETFs, click
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