Time To Buy Consumer Discretionary ETFs: 5 Top Picks

With the economy regaining momentum after a slowdown in the first quarter, the consumer discretionary sector looks like an exciting bet at present. This is because a strengthening economy and better job prospects are supportive of economically sensitive sectors like consumer discretionary, which typically perform well in a maturing economic cycle.

A flurry of upbeat data has spread optimism and bullishness at least in the near term in this important market segment.

After two months of lackluster gains, hiring in the United States rebounded with the addition of higher-than-expected 223,000 jobs in May. Unemployment dropped from 3.9% to 3.8%, the lowest since 2000 while average hourly wages rose 8 cents, pushing the year-over-year increase to 2.7%. Manufacturing activity expanded at a faster pace than expected, indicating that American manufacturing is enjoying a 21-month winning streak. Construction spending rose 1.8% in April -- the largest increase since January 2016, after a 1.7% decline in March (read: 4 Sector ETFs to Profit From Strong May Jobs Data).

Meanwhile, retail sales rose 0.3% in April with gains across most categories, especially furniture and clothing stores. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged the most in five months by 0.6% in April while consumer confidence rebounded near the 18-year high in May. The Consumer Confidence Index, as indicated by the Conference Board, rose to 128.0 from 125.6 in April. The upbeat data underscores the economy's strong fundamentals and consumers’ enthusiasm to spend more. The massive $1.5-trillion tax cut and deregulation would drive economic growth and create more jobs in the country. These would in turn increase confidence among consumers.

However, the booming economy could spark faster-than-expected rates hike by the Fed. But this doesn’t seem a problem for the sector as consumer discretionary stocks are well poised to benefit in a rising rate scenario given the improving health of the economy, which will create a wealth effect (read: Sector ETFs & Stocks to Win or Lose on Higher Rates).

Top-Ranked Consumer ETF in Focus

In view of the reasons discussed above, we strongly believe that investors should consider consumer discretionary ETFs. For them, we have found a number of ETFs that have the top Zacks ETF Rank #1 (Strong Buy) or 2 (Buy) in the consumer discretionary space and are thus expected to outperform in the months to come.

These funds are enjoying strong momentum and have potentially superior weighting methodologies that could allow these to continue leading the consumer space in the months ahead (read: all the Consumer Discretionary ETFs here).

Consumer Discretionary Select Sector SPDR Fund XLY

This is the largest and the most popular product in the consumer discretionary space with AUM of $14 billion and average daily volume of 5.9 million shares. It tracks the Consumer Discretionary Select Sector Index and holds 81 securities with higher concentration on the top firm Amazon (NASDAQ:AMZN) with 22.2% share. Other firms make up for a nice mix, with each holding less than 7.4% of assets. From a sector look, Internet & direct marketing retail takes the top spot with 31.5% of assets, followed by media (18.4%), specialty retail (17.7%), and hotels, restaurants and leisure (13.4%). The fund charges 13 bps in fees per year and has added 4.8% over the past one month. It has a Zacks ETF Rank #1 with a Medium risk outlook.

Invesco DWA Consumer Cyclicals Momentum ETF PEZ

This product tracks the DWA Consumer Cyclicals Technical Leaders Index. It holds 39 stocks having positive relative strength (momentum) characteristics, with each holding less than 4.3% of assets. About 27% of the portfolio is dominated by specialty retail closely followed by 21.1% allocation to hotels, restaurants and leisure. The fund has managed $58.3 million in its asset base while trades in a lower average daily volume of 12,000 shares. It charges 60 bps in annual fees and has gained 7.6% in a month. The product has a Zacks ETF Rank #2 with a Medium risk outlook (read: 5 ETFs to Buy at 52-Week High).

iShares Edge MSCI Multifactor Consumer Discretionary ETF (BO:CNDF)

This ETF has attracted $3.4 million in its asset base and trades in a meager volume of under 1,000 shares. It targets companies that have the potential to outperform the broad U.S. consumer discretionary sector and tracks the MSCI USA Consumer Discretionary Diversified Multiple-Factor Capped Index. Holding 41 stocks in its basket, the product is highly concentrated on Amazon, which accounts for 18.8% of the portfolio, while others make up for less than 5% share. The fund is skewed toward retailing at 18.2% while consumer durables and consumer services round off the next three spots with a double-digit exposure each. CNDF charges 35 bps in fees per year and is up 4.8% in a month. It has a Zacks ETF Rank #2.

First Trust Consumer Discretionary AlphaDEX Fund FXD

This follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. This approach results in a basket of 115 stocks that are well spread out across components, with each holding less than 2.1% of assets. Specialty retail is the top sector with 21.1% of the portfolio, closely followed by media (17%), and hotels, restaurants and leisure (14.8%). FXD has AUM of $421.7 million and trades in volume of 98,000 shares per day on average. It charges a higher 63 bps in annual fees and has gained 5.4% in a month. The product has a Zacks ETF Rank #2 with a Medium risk outlook.

SPDR S&P Retail (MX:XRT) ETF XRT

This product targets the retail sector and tracks the S&P Retail Select Industry Index, holding 85 securities in its basket, with none accounting for more than 1.72% of assets. Apparel retail takes the top spot at one-fourth share while Internet & direct marketing, specialty stores and automotive retail round off the next three spots with a double-digit allocation each. The fund has amassed $439.3 million in its asset base and charges 35 bps in annual fees. The fund has gained 8.8% in a month and sports a Zacks ETF Rank #1 with a Medium risk outlook (read: Here's Why the Rally in Retail ETFs Will Continue in 2H).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>


SPDR-SP RET ETF (XRT): ETF Research Reports

SPDR-CONS DISCR (XLY): ETF Research Reports

FT-CONSUMR DIS (FXD): ETF Research Reports

ISHRS-EMS MCD (CNDF): ETF Research Reports

PWRSH-DW CON CY (PEZ): ETF Research Reports

Original post

Zacks Investment Research