Beyond XLY: Considering Consumer Discretionary ETFs

by on January 30, 2012 | ETFs Mentioned:

Though the year is still very young, 2012 has gotten off to a promising start for investors. Major stock indexes have generally climbed higher throughout the first few weeks thanks to a number of encouraging data releases and reduced anxiety over the potential fallout from the European debt crisis [see also Early ETF Stars of 2012].

The second half of last year saw a flight among investors to safer securities, including utilities and dividend stocks. But as expected volatility continues to drop and momentum continues to build, many are likely looking for opportunities to dial up exposure to risky assets that generally experience greater volatility on the upside as well.

The consumer discretionary sector tends to be a high beta segment of the market that performs rather well when markets are showing strength. That connection is rather obvious; when consumer confidence–and spending–are on the rise, companies that provide entertainment, travel services, food and beverages, electronics, cars, and other discretionary items should perform quite well. For those looking to bulk up exposure to the consumer sector, there are a number of potential ETF plays.

Consumer Discretionary ETFs

The Consumer Discretionary SPDR (XLY) is by far the most popular ETF for investors looking to tap into this corner of the market. But it’s certainly not the only game in town; there are a number of interesting exchange-traded products that offer access to consumer discretionary stocks:

First Trust Consumer Discretionary AlphaDEX Fund (FXD)

For investors who believe quant-based ETFs are the optimal vehicle for delivering ‘enhanced’ returns, FXD is an intriguing option. The fund tracks the StrataQuant Consumer Discretionary Index, a benchmark that is designed to offer exposure to the best performing stocks from the  U.S. consumer discretionary sector. FXD utilizes the proprietary AlphaDex methodology to screen and select stocks with the greatest potential. The resulting portfolio consists of over 120 individual securities, and is relatively well-balanced with no one stock accounting for more than roughly 1.7% of the fund’s total assets.

PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD)

PSCD also provides investors access to the U.S. consumer discretionary sector, but does so with a targeted focus on small cap companies. While they are prone to higher levels of volatility, small caps generally tend to exhibit more growth potential than their large cap counterparts. PSCD’s portfolio features exposure across a wide array of sub-sectors in the consumer discretionary industry, including retail, automotive, leisure, recreation, and media companies. Currently, the fund’s top holdings include Carter’s, Inc., Wolverine World Wide, and Brunswick Corporation.

Rydex S&P Equal Weight Consumer Discretionary ETF (RCD)

Like many other Rydex products, RCD utilizes an equal-weighting methodology in its underlying index, creating a more balanced approach for investors wishing to tap into the U.S. consumer discretionary sector. This methodology results in exposure that is considerably less concentrated than other alternatives such as XLY, and many investors believe that this strategy will add value over the long haul. RCD’s portfolio also avoids overweighting large, popular, and overvalued stocks–a disadvantage that is inherent in most market-cap weighted funds. In return for this equal-weighted exposure, investors can expect higher fees; RCD is slightly more expensive than most of the alternative funds with its expense ratio at 50 basis points [see also ETF Sector Rotation Strategies: Beyond The SPDRs].

Vanguard Consumer Discretionary Index Fund (VCR)

Vangarud’s VCR is perhaps the most economical option for investors wishing to tilt exposure towards the U.S. consumer discretionary sector. With an expense ratio of  a mere 0.19% and an underlying portfolio of over 360 stocks, VCR can be summed up in about two words: cheap and deep. The fund’s holdings are spread across a wide array of sub-sectors in the consumer discretionary industry, including investments in automotives, household goods, textiles, apparel, leisure equiptment, hotels, restaurants, media, and consumer retailing. Currently VCR’s top holdings include McDonald’s, Amazon, Walt Disney, and Home Depot. 

Niche Consumer Discretionary ETFs

There are also a handful of more targeted products that tap into specific sub-sectors of the consumer discretionary market, from gambling to media:

  • Market Vectors Gaming ETF (BJK): This ETF offers exposure to companies engaged in the gaming industry, including manufacturers of slot machines and casino operators.
  • PowerShares Dynamic Media Portfolio (PBS): This fund provides investors access to the U.S. media industry, including exposure to some of the country’s most well-known companies such as CBS, News Corp, and Comcast Corporation.
  • PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ): This ETF offers exposure to companies in the leisure and entertainment industry. Holdings range from popular media companies such as Discovery Communications to fast-food giants like McDonalds.

International Consumer Discretionary ETFs

For investors looking to make a more global play on this sector, there are a handful of interesting products out there:

  • iShares MSCI ACWI ex US Consumer Discretionary Sector Index Fund (AXDI): This ETF focuses on consumer discretionary stocks from countries outside the U.S., including both developed and emerging markets.
  • SPDR S&P International Consumer Discretionary Sector ETF (IPD): This fund targets non-U.S. consumer discretionary equities from developed countries. Heavy allocations are given to Japanese companies, many of which are involved in the automobile industry.
  • iShares S&P Global Consumer Discretionary Index Fund (RXI): This ETF provides access to the consumer discretionary sector of global equity markets. It features exposure to equities from the U.S., Japan, United Kingdom, France, Germany, and several other countries.
  • EGShares India Consumer ETF (INCO): This fund is designed to measure the performance of companies in the consumer sector of India. INCO is comprised of 30 individual stocks, with heavy allocations towards large and mid cap firms.
  • EGShares Consumer Services GEMS ETF (VGEM): This ETF tracks 30 of the largest emerging-market companies in the consumer services industry, including stocks from South Africa, Mexico, Chile, Malaysia, China, Russia, and Brazil.

Disclosure: No positions at time of writing.