As market corrections seem overdone since the bloodbath at the start of the year, investors may now take a look at some high-growth investing areas, like the consumer discretionary stocks space and its related ETFs. This is especially true given the three-month high U.S. consumer confidence index for January.
The index rose to 98.1 in January from December's revised reading of 96.3. The reported score also beat the consensus estimate of an increase of 97.8. A strong job market, rock-bottom energy prices and still-subdued inflation levels have helped to counter for the stock market turbulence so far this year and have boosted consumer confidence.
A benign Fed refrained from raising the interest rate at its January meeting; it no more sounds sure about four rate hikes this year, and has not even taken the option of negative interest rates "off the table". This has not only restored consumer sentiment, but has also assured market watchers of a few more months of a cheap dollar.
Also, a lower dollar and a less harsh winter than the previous few years will give first-quarter 2016 the benefit of easy comparison in terms of economic activities. Upbeat retail sales for January have already given cues of the fact. U.S. retail sales excluding automobiles, gasoline, building materials and food services, inched up 0.6% in January versus an unrevised 0.3% decline in December.
The space is also coming up with decent performances in the ongoing earnings season. Total earnings are expected to be up 0.8% on revenue growth of 0.6% for the fourth quarter of 2015. The earnings growth rate is even better than the retail sector, which is expected to decline 1.7%.
The consumer discretionary sector is likely to pick up, with earnings growth rates of 1.4%, 4.7%, 6.2% and 9.6% projected for the upcoming four quarters, starting first-quarter 2016, as per the Zacks Earnings Trend issued on February 10, 2016.
Investors should also note that consumer stocks outperform in the early stages of a business cycle. Agreed, talks of a likely recession in the U.S. are doing rounds, but in our opinion, the odds of such a slowdown are minimal.
Given these positive developments, a look at some of the top-ranked ETFs in the space could lead investors to the best ways to target the segment. In order to do this, investors can check the Zacks ETF Rank and find the top-ranked consumer discretionary ETFs best suited for their purpose. We have highlighted three ETFs which were upgraded to a Zacks ETF Rank #1 (Strong Buy) a month ago.
Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY)
This $9.1 billion ETF looks to track the S&P Consumer Discretionary Select Sector Index. Holding 88 stocks in its portfolio, the fund puts about 25% of assets in Amazon (NASDAQ:AMZN), Home Depot (NYSE:HD) and Walt Disney (NYSE:DIS). Media (24.8%), Specialty Retail (20.5%), Hotels Restaurants & Leisure (15.01%) and Internet & Catalog Retail (14.94%) have double-digit exposure in the fund. XLY lost 3.7% in the last one month (as of February 12, 2016) and yields 1.6% annually. The fund charges 14 bps in fees.
iShares U.S. Consumer Services ETF (NYSEARCA:IYC)
This fund targets the Dow Jones US Consumer Services Index. The 186-stock fund has accumulated about $917 million in assets and has moderate company-specific concentration risk, with the top holding Amazon accounting for 7.43% share of the basket.
The fund charges 44 bps in fees and has a tilt toward Retail (35.0%) and Media (23.1%) stocks, although Food & Staples Retail (16.2%) and Consumer Services (16.1%) also have double-digit exposure each. So far this year, the fund is down 3.3% (as of February 12, 2016). The product yields about 1.14% annually (as of February 12, 2016).
PowerShares Dynamic Media Portfolio ETF (NYSEARCA:PBS)
The approach results in a small basket of 30 media stocks, with none of the firms holding more than 6.07% share. The product has amassed $87.5 million in its asset base. Time Warner Cable (TWC), Facebook (NASDAQ:FB) and Alphabet (GOOG, GOOGL) are the top three holdings of the fund. The ETF charges 59 bps in annual fees and has lost nearly 7% in the last one month (as of February 12, 2016).