Consumer ETFs To Watch On McDonald’s Corporation Earnings [Consumer Discretionary SPDR (ETF)]

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January 27, 2014 5:19pm NYSE:DOD NYSE:VCR

mcdonaldsIt was yet another subdued quarter from McDonald’s Corp. (NYSE:MCD) which surpassed the estimate on bottom line, but missed the top line in 4Q13. The world’s biggest burger chain has been faltering due to a fragile macro economy, changing eating habits,

and cutthroat competition.

McDonald’s 4Q Earnings in Focus

The hamburger behemoth’s 4Q13 earnings of $1.40 per share nudged up 1.4% year over year and beat the Zacks Consensus Estimate by a penny.  The slight upside was driven by an increase in the top line.

Revenues grew 2.0% year over year to $7.0 billion during the quarter, but failed to match the Zacks Consensus Estimate of $7.1 billion due to sluggish comps. Comps dropped 0.1% in contrast to expectations of an increase of 0.9% due to lesser guest count.

Among three geographic regions, comps grew only in Europe (up 1%) while the U.S. and Asia/Pacific, Middle East and Africa (APMEA) were the laggards. Notably, the U.S. segment was otherwise well-placed thus far. But, the strike by fast food workers in the U.S., relatively flat industry traffic trends and inclement weather in December might have hit the region hard this time.

Market and ETF Impact

Despite the soft earnings announcement, McDonald’s share prices managed to secure a gain of 0.46% in a single trading session on January 23, though it fell 0.03% in after-hours trading.

Although MCD rose on the day, the company’s sluggish revenue growth didn’t bode well for others in the sector. This is especially true in consumer funds where MCD has decent exposure such as the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) and Vanguard Consumer Discretionary ETF (NYSEARCA:VCR).

Both XLY and VCR slipped 0.71% and 0.77% respectively in McDonald’s key session. However, the duo has a Zacks ETF Rank #2 (Buy) with ‘medium risk’ outlook and could be interesting picks for investors.

Downbeat tone in the overall consumer discretionary space might have caused the duo to fall despite the increase in McDonald’s share price. Thus, risk tolerant investors might consider buying the products on the recent dip (see all the Top Ranked ETFs here).

XLY in Focus

XLY is by far the largest product in the consumer discretionary space with more than $7.0 billion of assets. In its 85-stocks portfolio, the in-focus McDonald’s takes up the fifth spot with 4.67% allocation.

The ETF charges a meager 18 bps in fees a year and pays a dividend yield of 1.19%. The fund returned 42.7% in 2013 but has lost about 3.1% in the year-to-date time frame (as of January 23, 2014).

VCR in Focus

This is the second largest fund in the space with about $1.45 billion in AUM invested in 375 stocks. Here also, MCD takes up the fifth position with 3.5% of assets. The fund surged a handsome 43.7% in 2013 while it has shed 3.08% so far this year.

VCR is a cheaper fund, charging only 0.14% of expense ratio while returning 0.87% in the form of yield.

Look Up to McDonald’s Dividend

For investors still skeptical about McDonald’s success in the near term and are thinking twice before betting on this stock or ETFs including this stock, it is worth pointing out that McDonald’s is an intriguing dividend play. As of January 23, its dividend yield stood at 3.41% so it is an income destination for many investors (read: 3 Best Dividend ETFs of 2013).

On this virtue, McDonald’s created a place for itself in the ‘Dogs of the Dow’ – an investment strategy that represents the 10 highest yielding Dow Jones Industrial Average (DJIA) blue chip companies that are near the bottom of their business cycle and thus pay higher dividend yields thanks to depressed stock prices.

The added investor interest on McDonald’s thanks to its higher dividend yield will help it to spring back faster than its peers once the business cycle changes, resulting in capital appreciation as well. For this year, McDonald’s occupies the fifth position in the ‘Dogs of the Dow’ list.

There is one pure play product in this space – ELEMENTS DJ High Yield Select 10 ETN (DOD). The note has amassed $23.1 million in its asset base while charges 75 bps in fees per year. Though it was up 35% in 2013, it fell 0.17% so far this year thanks to the rising rate concern.

This article is brought to you courtesy of Eric Dutram.

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