Stock Up On These ETFs As Spending Is Surging (RTH, XLY, FXD)

Neena Mishra: U.S. economy grew at an annual rate of 2.0% during the third quarter of 2012, aided by robust consumer spending and housing recovery.  The growth came in better than the estimates and up from 1.3% growth in the second quarter.

The report shows while the businesses are hesitant to increase spending or investments due to the uncertainty related to the fiscal cliff, Euro-zone recession and slow-down in the emerging economies, the American consumers are now much more willing to spend. (Read: 3 ETFs To Prepare For The Fiscal Cliff)

Consumer spending in fact accounted for most of the increase in GDP, as the purchases by U.S. residents of goods and services increased 2.1% in the third quarter, compared with 1.0% increase in the second quarter.

The consumer spending report released this morning by the Commerce Department was also in-line with the positive trend. Spending rose at a seasonally adjusted 0.8% rate in September, its fastest rate since February.

Increasing personal consumption is a clear sign that the Americans are now becoming more confident about the economy and the job situation. This may be due to slight improvement in the recent employment data and increasing signs of a housing recovery.

Many economists believe that there is a strong relationship between housing and consumer confidence. As consumer become more optimistic about the value of their homes, they are more inclined to open their wallets. (Read: ETFs That Will Haunt Your Portfolio-If You Do Not Buy Them)

Further confirming the rising consumer confidence was the University of Michigan’s survey which reported consumer sentiment rose from 78.3 in September to 82.6 in October; the highest since September 2007— three months before the beginning of the recession.

As the holiday season approaches, consumer spending may gain further momentum in the coming weeks. So, now may be good time to look at Consumer Discretionary and Retail ETFs, which may outperform the broader market, due to the benefit from holiday shopping. (Read: Guide to 10 Great ETFs Yielding 7% or More)

Market Vectors Retail ETF (NYSEARCA:RTH)

RTH tracks the Market Vectors US Listed Retail 25 Index, which is a rules based index designed to track the performance of 25 of the largest US listed publicly traded companies.

The fund charges an expense ratio of 0.35% (capped through May 2013). In terms of sector exposure, Consumer Discretionary stocks dominate with more than half of the assets invested.Top holdings are Wal-Mart (14%), Amazon (10%), Home Depot (10%) and CVS (6%).

The fund has Zacks ETF rank of 1 (Strong Buy) and risk rating of ‘Low’.

Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY)

XLY tracks the Consumer Discretionary Select Sector Index. Launched in December 1998, this fund is the largest in the space now with more than $3.2 billion in AUM.

It is also among the cheapest choice in the space with the expense ratio of just 18 basis points. Further, the ETF has a decent dividend yield of 1.47%.

The ETF has highest exposure to Media stocks (32%), followed by Specialty Retail (20%). Comcast, Home Depot, Disney and McDonald are the top four holdings, each with more than 6% asset weight.

The ETF enjoys Zacks ETF rank of 2 (Buy) and risk rating of “Medium’.

First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD)

FXD tracks the StrataQuant Consumer Discretionary Index, which employs the Alphadex methodology to select stocks from Russell 1000 index. The index is a modified equal-dollar weighted index which uses fundamental growth and value factors to select stocks. Specialty Retail (26%), Media (20%) are among the top sectors.

FXD enjoys the top Zacks ETF rank of ‘1’ but with a ‘high’ risk rating meaning that the ETF may outperform its peers but may exhibit much higher volatility. The ETF is also slightly more expensive compared to the other two with a net expense ratio of 70 basis points.

Written By Neena Mishra 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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