With major U.S. equity indexes sitting at all-time highs and emerging markets still in a very deep hole, many on the sidelines have been left wondering which asset class is still ripe with opportunity. The bulls continue to favor cyclical sectors well-positioned for rising rates, including technology, industrial, and financials; while the bears remain wary as looming seat changes on the Federal Reserve board could inspire the next correction. The clouds of uncertainty looming over Wall Street have prompted us to look to the past for clues as to what asset classes may drive the next rally as the summer seasons winds down [see Visual Guide: Major Index Returns By Year].
As such, below we highlight two sector ETFs that stand to benefit from the upcoming back-to-school shopping season; these funds have historically generated very positive returns over the coming months thanks to increased consumer spending [see Consumer-Centric ETFdb Portfolio].
Seasonal Sector Investing
Seasoned investors and shopaholics alike are well aware that the end of summer welcomes back-to-school shopping, a seasonal trend which then spills over to winter as people start to stock up on gifts for the holidays as well. Heavy shopping between August and January has even prompted retailers to start running promotions earlier, which does hurt margins a bit, but the increase in volumes generally outweigh the profits lost to discounts. Some experts are predicting that teen retailers in particular will face a tough sales season thanks to growing competition from discount retailers.
Nonetheless, the period spanning September through the beginning of June in the following year tends to be very favorable for the consumer sector; historically, back-to-school shopping coupled with holiday spending has produced average returns upwards of 10% over the last 15 years for this sector according to data compiled by the Stock Traders Almanac. Below we highlight two ways to play this seasonal trend, highlighting options to take advantage of discretionary as well as non-discretionary spending:
First Trust Consumer Staples AlphaDEX Fund (FXG, B+)
This ETF employs a rigorous screening methodology to select the best consumer staples stocks from the Russell 1000 Index. The AlphaDEX approach has raked in a generous 33% YTD, while the more popular Consumer Staples Select Sector SPDR (XLP, A) has managed to return just under 20% in the same time period. This ETF’s underlying holdings are defensive names that can hold their ground if markets get rocky, while still being able to take part in rallies when global growth expectations improve. Look for pullbacks in FXG to establish a long position; this ETF has support around $32 a share followed by the $30 level [see Want A Simple, 3-ETF Portfolio? Here Are 25 Of Them].
State Street SPDR S&P Retail ETF (XRT, A)
This ETF offers exposure to some of the largest and most popular retailers, including everything from Dollar Tree Stores (DLTR) to Joseph A. Bank Clothiers JOSB. Overall, XRT’s underlying holdings are more cyclical than those of XLP, and as such, this ETF stands to offer a greater profit potential along with more volatility; this ETF has a 200-day volatility of 15.15% compared to XLP’s reading of 12.73%. Given its stellar performance YTD, look for pullbacks in XRT to establish a long position; this ETF has immediate support along the $80 level followed by $74 a share.
The summer and holiday shopping seasons have historically produced excellent returns for consumer stocks over the coming months; however, investors should be aware that looming uncertainty over the Fed tapering bond-repurchases could spark a broad-market correction that supersedes this seasonal trend. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.