Consumer ETFs: Retail and Consumer Discretionary Are Whipping the Indexes

Consumer sentiment sits at 15-year lows. Gas prices are at all-time, inflation-adjusted highs. Housing prices have never fallen so far so fast.

Yet, people are still going to the stores. Moreover, they are not just going for toilet paper and toothpaste. They're spending money on "discretionary items."

On Thursday, June 5, retailers posted surprisingly strong sales numbers. Wal-Mart (WMT) hit a 4-year peak, commenting that its customers are spending their tax rebate dollars. (Note: Fed Chairman Bernanke did include the tax rebates alongside the prior rate cuts when he discussed expectations for future growth.)

But why should this be? Virtually every poll on "What will you do with the rebate" pointed to debt payback. Nearly every newspaper discussed the rebate in terms of a meaningless gesture rather than a meaningful stimulus. (Plus, plenty of taxpayers didn't "qualify" to receive a rebate check.)

Clearly, there's a discrepancy between what people say and what people do. This is evident in the fact that 3 of the premier ETFs on consumer behavior will all have YTD gains at close of business, 6/5/2008.

The S&P SPDR Retail Fund (XRT) and the S&P Consumer Discretionary Select Fund (XLY) should have gains in the 1%-2% range for 2008. The Merrill Lynch Retail HLDR (RTH) may be up as much as 7%-8% due in large part to a heavy Wal-Mart weighting.

A skeptic might say that the enthusiasm is doomed to be short-lived. He/she might persuasively argue that the housing recession is so vast and so deep, the impact will have to take its toll.

Meanwhile, an optimist might say that, were it not for financials/housing, the U.S. economy is already recovering. Further, the same optimistic person may believe that financial companies and real estate prices have already seen the worst of it.

What if you belong to neither camp? What if you are neither too optimistic or too pessimistic... how might you approach your investment decision?

It may make the most sense to remove your emotions from the process entirely. After all, the S&P Consumer Discretionary Select Fund and the S&P SPDR Retail Fund  were among 2007s worst ETF performers. The gains may be an example of early sector rotation. Additionally, the consumer spending proxies are beating all of the major benchmarks, like the S&P 500 SPDR Trust (SPY), the Dow Industrials Trust (DIA) and the PowerShares QQQ Nasdaq 100 (QQQQ).

You don't have to be an optimist or pessimist on consumer discretionary ETFs. If you are uncomfortable with the sector, you can stay broad with the Vanguard Total Stock Market Index (VTI).

On the other hand, if you wish to let the market itself tell you what to do, it does seem to be favoring many of last year's biggest losers. Granted, the market still hasn't embraced the financial sector at large. Yet iShares Cohens and Steers Realty (ICF), the Dow Jones Transportations Fund (IYT) and the S&P Consumer Discretionary Select Fund have all pushed their way into the green. (And that's better than the major averages!)

Economic recovery? If there is one in the works, here's a "Hit List" for profiting.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Xyrus]

Consumer discretionary is doing well because the average individual has all the financial know-how of a grapefruit.

The savings rate in the US is negative, consumer debt is at record levels, and we have unprecedented numbers of people going late or defaulting on their loans and credit cards.

And as Walmart et al. have shown, people aren't taking their FED checks (that our children will be paying for, thanks congress) and paying off their debts, or even putting it away for a rainy day. They're spending it on discretionary items.

One definition of insanity is doing the same thing over and over again and expecting a different result. That's the average consumer. They're once again spending (borrowed) money in the hopes that it somehow makes their debt go away.

Congress, of course, also hopes that by going deeper into debt (FED checks), that they will somehow stimulate the economy. Of course they're wrong. Those checks won't last more than a month or two, especially with prices spiraling up. Then we will see what consumer spending is really like, given the somewhat poor state of the economy.

By all means play the consumer discretionary angle. But you may want to get out before August. However, in a slow economy Walmart is always a good bet.

~X~

[PCScipio]

Good god, Gary! Are you looking for a pumper job on CNBC? As Mauldin summed up in today's e-letter:

Retailers that did not have food and gas to boost their sales showed considerable weakness. GAP was off 14%, JCPenney down 4%, and Limited Brands down 6%. Even the high-end stores like Saks (-9%) were down, and Nordstrom projects that June will be down 22%. Given the sales tax numbers, I would not be buying the retail stocks on the dips. There is an old saying about trying to catch a falling knife.