Even with the recent gains in stocks, we think investors seeing green shoots have two solid options to enhance exposure to a broad-based recovery in consumer names. Both the Vanguard Consumer Discretionary ETF (VCR) and Consumer Discretionary Select Sector SPDR (XLY) represent sound satellite holdings that trade at modest discounts to our fair value estimates. The majority of the underlying companies in these funds rely on discretionary spending and are well-positioned to pick up market share and emerge from the downturn relatively stronger than their competitors. In addition, both funds offer low costs and fine liquidity. Despite the compelling characteristics of these ETFs, we would wait for pullback in prices to get to more-compelling valuation levels. After all, the recent rally may turn out to be a head fake and the recovery could be more muted than what is implied by the underlying share prices, in aggregate.
Making the Decision
Before making such a sector bet, having a well-thought-out thesis is critical. Does one foresee the green shoots sprouting into a full-blown consumer-led recovery? An increase in the consumer-spending portion of first-quarter GDP, a possible bottoming out in jobless claims, and some better industrial production data may support such a thesis. On the other hand, perhaps slowing April retail sales, a continued contraction in consumer credit, an increase in the savings rate, and still-depressed housing and auto sectors point to, at best, a modest recovery. Consumer spending may remain depressed for some time.
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