Consumer Discretionary ETF Could Have Room to Run

October 15th at 6:00am by Tom Lydon

The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) is already up 29.3% this year, making it the second-best of the nine sector SPDR ETFs, trailing only the Health Care Select Sector SPDR (NYSEArca: XLV).

Over the past 90 days, XLY, the largest discretionary sector ETF by assets, has climbed 2.4% and currently trades pennies below its 52-week high of $61.75. XLY could soon make a new high, according to one technical analyst.

XLY “remains in good shape, with steady price and relative uptrends. The price chart has support from its 50-day exponential moving average. The relative chart, versus the S&P 500, has just turned up from lower support of a rising trend channel, drawn up from its February low,” wrote Tarquin Coe of the Coe Report.

XLY has surged 85.4% over the past three years and has experienced a minimal amount of noticeable pullbacks along the way. That indicates the ETF has remained solid in the face of numerous macro headwinds including two U.S. debt ceiling debates, sequestration and a spike in Treasury yields earlier this year.  [These Sector ETFs Should Work if Treasury Yields Rise Again]

XLY actually functions as an ideal rising rates play because the consumer discretionary sector is the best-performing group in rising rate environments.

Rising rates benefiting discretionary stocks and ETFs may run counter to conventional wisdom that higher borrowing costs will turn spendthrift consumers into frugal savers. However, stout consumer confidence data combined with rising rates can be a favorable scenario for discretionary names.

Further bolstering the case for XLY and rival ETFs from a fundamental perspective is dividend growth within the discretionary sector. The sector, along with technology and financial services, has been one of the leading sources of S&P 500 dividend growth over the past several years.  [Ahead of Fed, Consider Discretionary ETFs]

As for the technical side of things, Coe had this to say about XLY: “With the fund not being overbought, evident from the 14-day RSI rising through neutral, a breakout to new all-time highs is likely in the sessions ahead. It’s our favorite sector, as demonstrated by the high allocation in our portfolio; further outperformance expected.”

Consumer Discretionary Select SPDR

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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