Growth in Consumer Discretionary and Retail ETFs

by: Michael Krause

'Tis the season to go shopping, and investors are looking for signs that consumer spending may finally be rebounding after several years of miserable holiday sales. Early reports of retail sales over the Thanksgiving holiday appear encouraging (+6.4% YoY according to the National Retail Federation).

Regular readers will recall we're more downbeat about the prospects for consumer-related stocks, however. While we do expect some rebound in consumer spending as the economy pulls out of the deep recession, growth is likely to remain subdued. For three decades consumers increased spending faster than incomes by reducing savings (Figure 1); that is now working in reverse (which ultimately is a healthy and necessary development). Further, now that baby boomers are starting to retire there should be a downshift in spending from that demographic over the long term.

Figure 1: U.S. Savings rate, 1950-present

(Click to enlarge)

Source: Dept. of Commerce, Bureau of Econ. Analysis

This week's chart of 2011E sales growth for the eight consumer discretionary and two retail ETFs in our universe seem to bear this out. Forecasts call for growth of only 3.9-6.6% (Figure 2) and the ALTAR Scores -- our rating of an ETF's overall investment merit -- for all ten of these funds are rather low. Still some appear to be better investments than others, and one that stands out, the SPDR S&P International Consumer Discretionary ETF (NYSEARCA:IPD), is the subject of this week's Fund Focus.

Figure 2: Consumer Discretionary & Retail ETF Sales Growth
Change in Sales per share estimates, 2011 vs. 2010

(Click to enlarge)


Table: Ticker, Fund Name & ALTAR Score™ of ETFs in above chart

Ticker Name ALTAR Score
FXD First Trust Consumer Discretionary 4.1%
XLYS PowerShares S&P Small Cap Consumer Discretionary 2.9%
PMR PowerShares Dynamic Retail 4.8%
PEZ PowerShares Dynamic Consumer Discretionary 5.0%
VCR Vanguard Consumer Discretionary ETF 4.0%
XLY Consumer Discretionary Select Sector SPDR 4.5%
RXI iShares S&P Global Consumer Discretionary 4.7%
XRT SPDR S&P Retail ETF 5.3%
IPD SPDR S&P International Consumer Discretionary 5.3%
RCD Rydex S&P Equal Weight Consumer Discretionary 3.8%

Disclosure: No positions