Bet On The American Consumer With These 3 ETFs
You pretty much have to believe in the resiliency of the U.S. consumer, as spending comes as second nature to most Americans. And given some of the recent economic trends, we could definitely see a burst in purchasing in the near term by this consumption-hungry group. Recent Trends After years of stagnation, the job market is finally starting to come back, giving plenty of lower income consumers some extra cash. And, with the market finally seeing some wage inflation raises, more money is going into consumers’ pockets all the time. Consumers are also seeing strong stock prices which makes many feel wealthier and thus more likely to spend, while the current state of the housing market doesn’t hurt matters either. After all, a house is the biggest investment for most people so with the Case-Schiller 20 city well off of the post-crash lows, the general mood is much improved as well. But arguably the most important trend for consumers lately is the sudden crash in oil prices. Crude has fallen to levels unseen in years, reducing gas costs for millions of Americans. These small savings each week are finally starting to add up, and are basically a massive tax cut for the middle class, freeing up dollars for discretionary purchases. Impact These trends set up nicely for the consumer sector, and in particular, the cyclical space. However, it is worth noting that we have yet to truly see a stock price impact, as many consumer stocks and funds have not led the market higher so far in 2015. This is actually great news for investors as it suggests there is still time to get in on the sector before consumers reallocate their new-found money to discretionary purchases. And thanks to ETFs, we don’t have to guess which particular company will benefit the most, as we can just buy the whole sector instead. For investors seeking to apply this approach to their portfolios, we have highlighted three consumer discretionary ETFs below which could be excellent choices in this type of environment. All three are quite diversified and have significant holdings in mid or small cap stocks, giving them a big tilt towards U.S.-centric companies: PowerShares DWA Consumer Cyclicals Momentum Portfolio ETF ( PEZ ) This fund looks to identify companies that are showing relative strength characteristics in the consumer cyclical space. The ETF seeks to hold at least 30 stocks in its portfolio, while it will charge an expense ratio of 60 basis points a year. Current holdings are focused on specialty retail (23%), airlines (15.5%), and hotels/restaurants/leisure (14.8%). However, it is worth noting that the product is pretty well spread out from an individual holding perspective, as no single company makes up more than 5.3% of total assets. We should also point out that the fund has a pretty health allocation to small and mid cap securities as these make up close to 60% of the portfolio. Currently, the fund has a Zacks ETF Rank #2 (Buy) and a medium risk outlook. Guggenheim S&P Equal Weight Consumer Discretionary ETF ( RCD ) For another way to play the consumer market, RCD is an excellent choice for those seeking an equal weight approach. The fund takes the S&P 500 consumer discretionary sector, and instead of weighting by market cap, gives each company in the space the same level of holdings. This results in a fund that has about 21% of its assets in specialty retail, 17% in media, and then 12.8% in the hotel/restaurant/leisure category. And due to the equal weight approach, no single company makes up more than 1.6% of assets. The ETF puts about half its portfolio in mid caps and the rest in large caps, which compares to roughly 80% large caps for the cap-weighted Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ). RCD currently has a Zacks ETF Rank #3 (hold) and it has a medium ETF Risk rating. PowerShares S&P SmallCap Consumer Discretionary Portfolio ETF ( PSCD ) If you are looking to just zero in on small cap securities in the consumer space, PowerShares’ PSCD will be tough to beat. The fund targets a subset of the S&P SmallCap 600 Index, focusing on about 90 companies that are in the business of providing consumer goods and services. The fund has a heavy focus on specialty retail (29%) and hotels/restaurants/leisure (about 29% each), followed by apparel (13.8%), and household durables (11.1%). It is pretty spread out in terms of individual holdings too, as only Jack In The Box (NASDAQ: JACK ) and Buffalo Wild Wings (NASDAQ: BWLD ) have allocations greater than 3% in the portfolio. The entire portfolio is focused on small caps, though it is worth pointing out that growth leads the way with a 40% holding. The fund has a Zacks ETF Rank #2 (Buy), though it has a high ETF Risk outlook.