3 Consumer ETFs To Watch On Consumer Sentiment Drop

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October 1, 2013 11:29pm NYSE:FXD NYSE:IYC

retail-shoppingDespite the upbeat tone in the market following the decision of the Fed to hold off on tapering, the drop in the U.S. consumer sentiment comes as a slight downer.

Driven by fears of a possible government shutdown and higher mortgage rates, consumer sentiment (as measured by Thomson Reuters/University of Michigan) moved to 77.5 for September, against a consensus report of 78. While this represents a modest increase from last month’s final figures, results are still sluggish and suggest a poor trend for the consumer.

Why the Sluggishness?

The drop in consumer sentiment can also be blamed on surging mortgage interest rates, which are currently lingering close to a two-year high, posing a threat to growth. The Freddie Mac data reveals that rate on a 30-year fixed mortgage loan has increased to 4.32% as of Sep 26, a level that represents a modest decline from previous weeks, but that it still high when compared to last year.

Higher mortgage rates coupled with increasing home prices are increasingly making it difficult to refinance and buy a new home, thereby affecting the housing recovery in the U.S. (read:Mortgage REIT ETFs: Is The Plunge Over?).

Moreover, the lackluster pace of hiring is weighing down on consumer purchases, which account for 70% of the economy. Additionally, retail sales (as reported by the Commerce Department) for the month of August increased nominally by 0.2% as against the consensus estimate of 0.4%.

The Brighter Side

Still even with the sluggish sentiment, not all the data has been bad. Personal income figures came in at the consensus and showed month-over-month changes of 0.4%. Consumer spending also rose for August up to 3.7% (yoy), so the poor sentiment hasn’t really hit spending levels at all.

Consumer Discretionary ETFs in Focus

Despite the tug between optimism and pessimism, there are some consumer discretionary ETFs which look promising and are worth including in one’s portfolio, but that could need closer inspection after another sluggish sentiment report:

First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD)

Though the fund is a bit pricey, charging investors 70 basis points a year, FXD provides quality exposure in the consumer discretionary space, with volumes suggesting that the fund is quite liquid. The fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks.

The product holds roughly 131 stocks, having double-digit exposure in Specialty Retail and Media. The fund is highly diversified as far as individual holdings are concerned, with no single stock representing more than 1.8% of the portfolio.

The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ and has delivered an impressive return of 29.2% year to date and 9.6% during the last three months (read: 3 Top Ranked Consumer ETFs to Buy Now).


XRT is one of the most popular ETFs in the retail space having an asset base of $908.56 million and is highly liquid, which should keep bid-ask spreads tight. The fund is pretty cheap, charging investors an annual fee of just 35 basis points.

The product holds a basket of 99 securities, offering wide diversification with no single firm taking up more than 1.6% of XRT. As far as sector allocation is concerned, Apparel Retail occupies the top spot with Specialty Stores and Automotive Retail occupying the second the third positions, respectively.

The product has a Zacks ETF Rank of 2 or Buy and has added a return 31.1% year to date, while delivering 7.6% for the last three months.

iShares U.S. Consumer Services ETF (NYSEARCA:IYC)

The fund tracks companies in fields like Retail, Media, Hotels, Textile and Apparel. The product manages an asset base of $442.66 million which it invests in 184 securities. General Retail and Media capture the two positions as far sector holdings is concerned having an exposure of approximately of over 37% and 29%, respectively.

The fund charges an annual fee of 46 basis points and is a little light on volumes having an average volume of 33,448 shares a day (see more in the Zacks ETF Center).

The fund too has a Zacks ETF Rank of 2 or Buy and has delivered a decent return of 24.2% year to date and 7.7% over the past three months.

Bottom Line

Despite the drop in the consumer sentiment for the month of September, the positive Zacks ETF Ranks seen in these funds suggest that more upside may be had in this space. However, recent activity is certainly troubling, so make sure to keep a close eye on this segment to see if the current trend continues, or if better earnings can dull the impact of this sluggish report.

This article is brought to you courtesy of Eric Dutram.

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