Tuesday’s ETF To Watch: Consumer Discretionary Fund (XLY)

by on September 14, 2010 | ETFs Mentioned:

With U.S. equity markets experiencing something of a September surge thanks to solid data points and moderating fears over the global economic situation, many investors have temporarily set aside their fears over a continued slowdown and have bought up a variety of equities. While many have ridden the stock wave in recent weeks, the economy remains on shaky ground and could tumble at the first sight of weak data. Because the American consumer makes up a robust portion of economic activity in the U.S., any data reports that come out regarding consumer spending are likely to move the markets. For investors seeking further clarification on this front, today looks to be a busy day thanks to a crucial earnings report from Best Buy (BBY) and advance retail sales figures for the month of August.

August advance sales look to be one of the most important advance reports in recent memory since the late summer period is generally a key time for companies seeking to capitalize off of back-to-school spending. According to a survey of 76 economists by Bloomberg News, retail sales in the U.S. are expected to advance for the second straight month in August by 0.3 percent after climbing 0.4 percent in July [also read Nine Twists On Sector ETF Investing]. Should this hold true, it could help to buoy retail firms heading into the fall quarter as they gear up for the holidays and allow investors to once again rethink their quick write-off of the American consumer.

Meanwhile, Best Buy is scheduled to post solid earnings for the most recent quarter with EPS of 46 cents per share, which is a 19.6% increase from a year ago on the back of decent gains in revenues (expected to have grown 5.7% to $11.7 billion). This hefty growth will be a nice change of pace from the company’s first quarter 2011 earnings which came in at 36 cents and missed analyst predictions by a massive 14 cents a share.

However, the company reaffirmed its guidance for the full year despite continued sluggishness in big ticket sales thanks in large part to its ability to capitalize off of its superior brand name which is arguably the best in the electronic store market segment. Due to this position, as well as the company’s poor showing in the previous quarter, the pressure will be on to beat estimates and maintain guidance for the rest of the year. If the company is unable to do that look for a variety of retail and consumer discretionary names to take a large tumble in Tuesday’s trading session.

Although Best Buy is curiously absent from virtually all ETFs, the company is still a retail powerhouse capable of moving the consumer discretionary market. As such, expect the Consumer Discretionary SPDR (XLY) to be active in Tuesday trading. The fund tracks the Consumer Discretionary Select Sector Index which includes companies from the following industries; retail; media; hotels; restaurants & leisure; household durables; textiles, apparel & luxury goods; automobiles, auto components and distributors; leisure equipment & products; and diversified consumer services. The fund holds 82 securities in total including large weightings to Amazon.com and Target, which both look to be heavily impacted by Best Buy’s guidance for the all-important holiday season. The fund charges an expense ratio of 0.21% and has surged as of late; posting a gain of 6.3% over the past month on an improved consumer outlook [also see Are Toilet Paper Sales Signaling A Strong Recovery?].

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Disclosure: No positions at time of writing.