3 Top Ranked Consumer ETFs For The Holiday Season

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December 16, 2013 3:54pm NYSE:FXD NYSE:PEJ

etfs etfsThe holiday season saw a weak start as early store openings, large discounts and attractive promotional offers by many retailers failed to drive budget-constrained consumers to shops.

According to the National Retail Federation (NRF), Thanksgiving weekend sales dropped 2.7%, representing the first decline in seven years while shoppers’ average spending was 4% less than last year. Further, comparable store sales in November rose 1.9%, falling short of expectation of 2.7% growth, as per data from Thomson Reuters.

As a result, core retail sales, excluding automobiles, food services, gasoline and building materials, picked up at a slower pace at 0.4% in November. The number is down from 0.7% growth reported in October. The sluggish start could bring bad news for many retailers, as holiday season sales account for a significant proportion of their annual revenues.

However, overall retail sales rose 0.7% in November led by a jump in automobiles and Internet sales. This represents the largest increase in five months and is above the revised 0.6% growth in October. With this sluggish growth pattern, investors have turned cautious on the retail sector in particular, but might want to look at the broad consumer discretionary space instead.

Broad Consumer Looks Better

A number of encouraging data in some key areas continue to fuel optimism in the consumer discretionary space in the holiday season and approaching the New Year. The labor market is showing clear signs of healing, housing market is on the recovery path and oil prices are at moderate levels (read: Is This ETF a Better Bet in the Consumer Space?).

In fact, recent consumer sentiment surveys have been extremely positive with the latest reading surpassing expectations and being the highest since July. The initial reading in the Thomson Reuters/University of Michigan survey came in at 82.5 for December, a whopping increase from 75.1 in November and well above the consensus estimate of 76.0.

This has spread bullishness in the entire sector, compelling customers to spend more on discretionary products and services. Further, according to Zacks Earnings Trends, earnings in the consumer discretionary sector will likely grow 9.7% in the fourth quarter, much higher than the 0.7% expected earnings growth for the retail sector.

For investors seeking to take advantage of the strong trends in the broad space, a look at the top ranked consumer ETFs could be a less risky way to tap into consumer market, with a much smaller focus on the retail space.

Top Ranked Consumer ETF in Focus

We have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ rating in the broad consumer space and are thus expected to outperform in the months to come.

Among these top ranked ETFs, we pick the following three as good choices to tap into the space. This trio has enjoyed strong momentum in the year-to-date period, and has potentially superior weighting methodologies which could allow these to continue leading the consumer space in the months ahead.

PowerShares Dynamic Leisure and Entertainment Fund (NYSEARCA:PEJ)

This fund tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 30 US leisure and entertainment companies. The product is pretty well spread out across various securities as the top 10 holdings account for nearly 46% of the total assets. Small caps dominate the fund’s return with nearly half of the portfolio, while there is a definite focus on growth stocks.

In terms of industry exposure, the fund is heavy on restaurants that make up for 46% share while hotels & leisure facilities, and casinos & gaming round out the next two spots (read: Gaming ETF (BJK) in Focus as Casinos Hit Jackpot). With AUM of $195.9 million, the fund charges slightly higher fees of 63 basis points per year. PEJ has returned over 43% in the year-to-date time frame.

First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD)

This is one of the more popular and liquid ETFs in the consumer space with AUM of $975 million and expense ratio of 0.70%. 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.

This approach results in a basket of 134 stocks that are invested across various market spectrums with large caps (41%), mid caps (40%) and small caps (19%). Each security holds less than 1.7% of assets.

Specialty retail is the top sector with nearly one-fourth allocation, followed by media (13.16%), and hotels, restaurants & leisure (9.52%). The ETF has added over 39% so far this year.

Guggenheim S&P Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD) 

This fund provides equal weight exposure to 83 U.S. consumer stocks by tracking the S&P 500 Equal Weight Consumer Discretionary index. The ETF has amassed $140 million in its asset base while charging 0.50% in expenses (read: Overweight These Equal Weight ETFs in Your Portfolio).

Within the consumer discretionary sector, specialty retail takes the top spot at roughly one-fifth of the total, followed by modest allocations to media, and hotel restaurants & leisure. Here, large cap and growth stocks take the majority of the allocation. RCD also returned 39% in the year-to-date time frame.

Bottom Line

These products have outperformed the broad sector fund, Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) and this trend is likely to continue in the coming months. Investors could definitely try these top ranked ETFs in the broad space for diversified exposure with lower risk rather than concentrating only on the retail names at this time.

This article is brought to you courtesy of Eric Dutram.

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