Although the consumer discretionary sector trades at a valuation premium to the S&P 500, there is no denying the group has been one of the biggest beneficiaries of tumbling oil prices.
It is not a coincidence that that West Texas Intermediate futures have plunged nearly 45% over the past six months and that plunge has been accompanied by the University of Michigan Consumer Sentiment Index residing at its highest levels since before the financial crisis. After all, oil’s pain is the U.S. consumer’s gain as crude’s woes have the effect of being a $100 billion tax cut for consumers. [Don’t Miss out on the Discretionary ETF Rally]
If oil prices stay as low as they are right now (WTI for January delivery closed at $55.35 per barrel Monday) or continue falling, the ensuing impact is at least $200 billion reduction in gasoline expenses for American drivers.
That would be good news for the PowerShares DWA Consumer Cyclicals Momentum Portfolio (NYSEArca: PEZ). PEZ is often overlooked in the consumer discretionary ETF conversation though there are reasons why this should not be the case.
For a decent portion of this year, apparel and specialty retail stocks disappointed investors, but that trend has reversed with the SPDR S&P Retail ETF (NYSEArca: XRT), an ETF heavy on those retail sub-sectors, gaining 8.1% over the past six months. PEZ, which allocates roughly 40% of its combined weight to apparel and specialty retailers, has participated in that rebound with a 4.1% six-month gain.
By way of its index methodology, which focuses on price momentum and relative strength, PEZ has the flexibility to rotate out of a sector’s lagging industry groups and into the ones that are showing noticeable relative strength. [Momentum Rebound Lifts This ETF]