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).
SPDR S&P Retail ETF (NYSEARCA:XRT)
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.