3 Ways To Target The Consumer Market With ETFs (PEJ, XRT, PSCD, XLY)

Eric Dutram: Although many might be worried about the approaching fiscal cliff, it appears as though consumers are putting off concerns on higher taxes and lower government spending, at least for now. In fact, in the most recent University of Michigan consumer sentiment index reading, the benchmark came in above expectations at 84.9.

This figure also marks a new post-2008 crash high for index, suggesting that consumers are feeling better about the economy now than at any other time since the market collapse roughly four years ago. The fact that this comes in spite of the election, government gridlock, and an official jobless rate near 8% is nothing short of astounding and it clearly shows just how resilient the American consumer can be (also see Access the $30 Trillion Consumer Market with These ETFs).

Given this continued impressive performance by American consumers, it may be time to shift portfolios into the segment. For ETF investors, there are several choices in the space including the ultra popular Select Sector SPDR- Consumer Discretionary ETF (NYSEARCA:XLY).

This fund has over $3.3 billion in assets and sees solid volume of over 6 million shares a day, suggesting incredibly tight bid ask spreads. Obviously with figures like this and the fund’s age of over a decade, it has been a preferred choice in the consumer cyclical ETF world (read Spending is Surging, Stock Up on These ETFs).

While XLY is a quality choice for broad discretionary exposure, there are also a number of other ETFs in the space that can provide similar exposure but have probably been overlooked by many investors. Any of these three ETFs below could also play on the positive consumer trends, but may be able to do so in a different—and potentially better performing—way than what we see in the broad XLY fund by diving into specific segments of this now in focus space:

PowerShares S&P SmallCap Consumer Discretionary Portfolio (NASDAQ:PSCD)

For a truly different look at the consumer market, an inspection of the small cap space could be warranted. This can easily be done with PSCD, a fund that tracks the S&P SmallCap 600 Capped Consumer discretionary Index.

This benchmark offers up exposure to a little over 100 stocks and charges investors a reasonable 29 basis points a year in fees. Volume and AUM is a little light though—along with dividends—so total costs thanks to a wider bid ask spread need to be taken into account (also read Two Zacks #1 Ranked Consumer Discretionary ETFs).

From a holdings look, specialty retail accounts for roughly 30% of assets, while apparel and restaurants each make up 15% each as well. It should also be noted that growth stocks account for roughly 45% of the portfolio, while micro cap securities take up a similar amount from a cap look, so this ETF could be volatile.


This ETF focuses on the S&P Retail Select Industry Index, an equal weight benchmark of firms that operate in the retail space. In this way, the fund offers concentrated exposure to the biggest single industry in XLY.

The fund holds just under 95 stocks in its basket and does a great job of spreading out assets with its equal weight technique as no single firm makes up more than 1.5% of XRT. Volume and AUM are also impressive for this fund, as nearly five million shares change hands every day and more than $600 million is in the product (also read Lower Wal-Mart Exposure with These Consumer ETFs).

In terms of exposure, specialty retail accounts for nearly 60% of assets, while department stores and internet/catalog retail account for another 24% combined as well. Interestingly from a cap perspective, the fund has just 20% in large caps and over 50% in small and micro caps, so it does look to be tilted towards pint sized securities.

PowerShares Dynamic Leisure and Entertainment ETF (NYSEARCA:PEJ)

While many investors might think of retail when looking at consumer discretionary stocks, they shouldn’t forget about the leisure and entertainment segments either. These can easily be accessed via the Dynamic Leisure and Entertainment Intellidex, a benchmark that evaluates a variety of firms on a number of fundamental criteria in order to put them in PEJ.

With this approach and focus, the fund holds just 30 stocks in total, with just two stocks accounting for more than 5% of assets—TWX and YUM. However, it should be noted that this product has just $50 million in AUM and sees volume of about 40,000 shares a day, so bid ask spreads could be relatively wide for the fund (read Play a Consumer Recovery with These Discretionary ETFs).

In terms of industries, restaurants take up the biggest spot with about 35% of assets, followed closely by hotels (20%), and movies/entertainment (18%). Like others on this list, there is a significant small cap component in this fund, as just over 50% of assets go to these types of securities.

Written By Eric Dutram From Zacks Investment Research   

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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