Consumer ETFs: If We Spend Less, Can They Keep Climbing?

by: Gary Gordon

Is the American consumer genuinely spending? While the combination of rising home prices and higher 401(k) values may contribute to a temporary wealth effect, higher payroll taxes may begin to exact a toll. Consider the curious case of SPDR Retail (NYSEARCA:XRT). Its year-to-date 16.2% haul is better than most large- and mid-cap benchmarks. Equally impressive, XRT has remained resilient, holding firmly above a near-term trendline.

On the other hand, the volume on down days is a great deal heavier than the volume of shares traded on up days. What's more, 20% of XRT's assets under management have disappeared in less than one month's time. It seems that profit-taking investors are convinced that apparel, specialty and automotive retailers will struggle to generate revenue in the weeks ahead.

If retail falls into the area of discretionary spending, one might be more inclined to purchase the stock shares of toilet paper and toothpaste corporations. Indeed, it's hard to argue against the technical strength of SPDR Select Consumer Staples (NYSEARCA:XLP). Fundamentally, however, the sector is sporting its highest multiple in a decade. Does the desirability of above-average dividend yields justify a 20% premium to the S&P 500 SPDR Trust (NYSEARCA:SPY)?

Some have suggested that now might be the perfect moment to rotate out of consumer discretionary and/or consumer defensive altogether. Yet these folks have been advocating the rotation since Q4 2012. Moreover, rotating into tech and energy because the sector P/Es are historically low ignores the economic slowdown that is gripping China, Europe, and the United States. The rotation also ignores the weakening relative strength factor (RSF) trends.

Quarter-Over-Quarter Relative Strength for a Variety of Economic Sectors
RSF 1/28 RSF 4/24
First Trust Internet (NYSEARCA:FDN) 93.8 69.3
SPDR Sector Select Industrials (NYSEARCA:XLI) 74.2 59.2
Vanguard Materials (NYSEARCA:VAW) 66.1 45.9
iShares DJ Oil Equipment and Services (NYSEARCA:IEZ) 62.7 42.8
Market Vectors Agribusiness (NYSEARCA:MOO) 67.7 30.1
iShares DJ Total Market (NYSEARCA:IYY) 62.5 66.1

Investors often benefit from rising relative strength coupled with "reasonably priced" growth and income. Admittedly, this has become increasingly difficult to find in a diversified exchange-traded vehicle. It follows that it may make the most sense to wait patiently for a pullback in equities of all stripes before committing new capital.

In all likelihood, you will not have to wait long for a meaningful sell-off to occur. U.S. stocks have fallen at least 5% in the first five months of every year since 1996. Indeed, now is the perfect moment to identify "wish list" candidates and the reasons why each ETF might be worthy of purchase.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.