Thursday’s ETF To Watch: Consumer Goods Index Fund (IYK)

by on November 18, 2010 | ETFs Mentioned:

As a variety of bailout related programs are paid back, some are beginning to believe that the American economy is finally in recovery mode thanks to tame inflation levels and optimism from major retailers over holiday season spending. One classic example of this trend is General Motors which has come roaring back to life from bankruptcy and is now scheduled to have an IPO later today after receiving billions in government aid at the height of the crisis in late 2008-early 2009.

This controversial payment kept the struggling automaker afloat long enough to go through a ‘pre-packaged’ bankruptcy process which drastically cut down the number of company brands, dealerships, plants and debt that the company had, allowing a much more nimble GM to come out of the proceedings. As the financial crisis eventually subsided, the new GM paid back all of its loans to the federal governments in both the U.S. and Canada but still remains majority owned by the U.S. government. Today’s IPO looks to change that as the company issues close to half a billion common shares which could push the government’s ownership of the company down to 33% from its current level of 61% [read Who Else Wants Ex-Sector ETFs?].

This incredible level of demand shows that many investors have forgiven GM for the sins of the bailout and are now eager to scoop up shares of this once iconic company, hoping that a streamlined structure will combine with a host of new models including the all-electric Chevy Volt to boost the company back to its former glory. Analysts now expect the company to price its new shares at $33, raising at least $15.8 billion in funds for automaker. If underwriters exercise an over allotment option and if the sale of preferred shares are factored in, the IPO could very well become the largest in world history, surpassing the $22.1 billion the Agricultural Bank of China received in its offering earlier this year [see Three Low Beta Equity ETFs For A Volatile Market].

While GM obviously isn’t in the iShares Dow Jones U.S. Consumer Goods Index Fund (IYK), we have decided to make it today’s ETF to watch nonetheless. IYK offers a top five allocation to fellow automaker Ford (F) as well as a variety of other companies which derive their sales from a confident consumer such as Procter & Gamble, Coca-Cola, and Pepsi. Despite a shaky market and an uncertain economic future, IYK has seen its shares rise by 11.6% so far in 2010, close to double the return for the broad S&P 500 suggesting that many believe that the American consumer isn’t done quite yet. If GM is able to meet expectations and attract a record number of investors to its IPO it could be a good sign for the struggling consumer industry indicating that if even the once despised ‘Government Motors’ is able to fall back into the good graces of the American investor, the consumer cannot be far behind [Warning: Commodity Surge Could Sink Consumer Staples ETFs].

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Disclosure: No positions at time of writing.