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With equity markets surging in July, many investors had hoped that the U.S. was finally pulling itself out of its nearly two year economic malaise. Private job hiring numbers in ADP’s report were solid, and concerns over the European debt situation seemed to be moderating as investors focus their attention elsewhere. Despite these initial positives, August has already proved to be a rough month for the consumer discretionary sector, with retail firms being among the hardest hit after bearish data to close out the past week.

Besides the Christmas holiday season, one of the most important times for retailers is the back to school period from late July to early September. Unfortunately for retailers, this crucial season got off to an extremely slow start with same store sales growth of just 2.8%, missing estimates of roughly 3% to 4% growth. “I believe we hit a soft spot,” said Jack Kleinhenz, chief economist for the National Retail Federation, a trade group. “The consumer is really cautious. I’m not expecting them to really break out into any real aggressive purchasing.”

This weak level of sales growth in one of the most important times of the year for retailers combined with a weak jobs report to pound ETFs in the ETFdb Consumer Discretionary Category in Friday trading. Private-sector payrolls rose by just 71,000 in July–far less than the 100,000 consensus estimate of Wall Street economists–suggesting continued weakness in the job market. This trend looks likely to continue due to the ending of the census program, which has helped to put millions to work temporarily. As this program winds down, it will likely add thousands to the list of job seekers, a development that could cause the unemployment rate to spike in the near-term [see Tough Times For Retail ETFs].

Including the temporary census jobs which were lost, total nonfarm payrolls slipped by a seasonally adjusted number of 131,000. To top things off, private payrolls in the previous two months were revised down by a cumulative 34,000 helping to add to the bearish mood on Wall Street which saw markets fall by more than 1.2% in early Friday trading and 10-year T-Bills test the 2.8% yield mark. Below, we profile three of the most impacted ETFs by these gloomy reports [also read ETF Plays For A "Retail Recovery']:

  • SPDR S&P Retail ETF (NYSEARCA:XRT): For a targeted approach focusing in on the retail sector, XRT offers an interesting choice. This fund is one of the most liquid in the sector with more than 15 million shares trading hands every day, and total assets stand at nearly a half billion. The fund is equal-weighted, holding 66 securities in total with a focus on medium cap (51.1%) and small cap securities (28.3%). This allows investors to obtain a different type of exposure than more large-cap focused funds [see more information about XRT on its fact sheet].
  • Consumer Discretionary Select Sector ETF (NYSEARCA:XLY): This fund tracks the Consumer Discretionary Select Sector Index, a benchmark that includes companies from the following industries: retail (specialty, multi-line, internet and catalog); media; hotels, restaurants & leisure; household durables; textiles, apparel & luxury goods; automobiles, auto components and distributors; leisure equipment & products; and diversified consumer services. As such, XLY offers a broad look at the discretionary market, with high allocations to McDonald’s (7.5%), Walt Disney (6.5%) and Comcast (5.2%). The fund holds 82 securities in total and has a heavy focus on large and giant cap companies, which make up close to 80% of the fund’s total assets [see more holdings information on XLY here].
  • First Trust Consumer Discretionary AlphaDEX ETF (NYSEARCA:FXD): For investors seeking an option tracking an ‘enhanced’ index, FXD is an interesting choice. The fund tracks the StrataQuant Consumer Discretionary Index, a benchmark that employs the AlphaDEX stock selection methodology to select consumer discretionary stocks from the Russell 1000 Index. This strategy has produced a fund that holds 121 securities in total with the highest allocations going towards Netflix (2.2%), Family Dollar (1.6%), and gaming firms Las Vegas Sands (1.6%) and Boyd Gaming (1.5%). By focusing in on the Russell 1000, the fund also has a heavy focus on medium sized companies which make up close to 60% of the fund’s total assets [also read Are Toilet Paper sales Signaling A Strong Recovery?].

Disclosure: No positions at time of writing.

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Source: Consumer Discretionary ETFs Slaughtered by Weak Data