This holiday season may not have retailers decking the halls, as most consumers are facing a thinning wallet, leaving exchange traded funds (ETFs) to follow.

U.S. retailers are expected to post the smallest holiday gains in six years, as consumers are tackling unemployment, mixed with rising food prices. Sales may gain 2.2% to $470.4 billion for the last two months of the year, reports Heather Burke for Bloomberg. This would be the slowest growth since 2002, when sales increased 1.3%.

Most consumers are actually afraid of spending too much on holiday items, and who can blame them? Daily life has become so expensive as rising food and gas prices are giving no breaks, and the highest unemployment rate in five years is still with us. Add to that a housing slump and a Wall Street meltdown, and most consumers are going to be bargain-hunting and discount-shopping.

Warehouse store Costco (COST) and discount shop Wal-Mart (WMT) may be in for a fruitful holiday season. Both stores benefit from their lure as discount retailers, enticing price-conscious consumers.

The economy is not expected to see an inkling of a turnaround until mid-2009.

• Consumer Discretionary SPDR (XLY),  down 12.4% year-to-date
• Vanguard Consumer Staples (VDC), down 4.5% year-to-date; Wal-Mart 9.6%
• SPDR S&P Retail (XRT), down 5.3% year-to-date
• Consumer Staples Select Sector SPDR (XLP),  down 4.7% year-to-date; Wal-Mart 11%

Tags: Retail, Sector ETFs, VDC, XLP, XRT