The consumer discretionary sector and related exchange traded funds have outperformed the broader market. With a growing U.S. economy, consumer spending may still pick up pace, especially as we get into the holiday season.
“Lower gas prices and higher employment have offset consumers’ concerns about anemic real wage growth, higher cost-of-living expenses on items such as rent and health care, and broad stock market weakness,” writes Mroningstar analyst Robert Goldsborough. “And even recently declining consumer sentiment readings still are well above their levels of a year ago.”
Consumer sentiment was 85.7 in September, down from 91.9 in August, Bloomberg reports.
Nevertheless, consumers remain confident and optimistic. Goldsborough points out that more affluent consumers are showing very strong sentiment while lower- and middle-income consumers are taking a more middle viewpoint.
Meanwhile, consumer sector stocks have been outperforming this year. Year-to-date, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) returned 4.6%, whereas the S&P 500 index dipped 3.8%.
XLY is fairly top heavy and includes exposure to retail firms, restaurants, media companies, apparel and luxury goods companies, automobile manufacturers and leisure industries.
“Investors interested in this ETF should beware, however. Consumer discretionary companies have a consistent history of outperforming in the early stages of a business cycle and underperforming late in a business cycle,” Goldsborough warned. “So this certainly is not a fund that one would want to own if one believes that the U.S. economy is headed toward a recession.”
Retailers make up a large portion of the underlying holdings. E-commerce and greater mobile commerce usage has also been a big game changer in the industry, especially with more consumers using online sources like Amazon (NasdaqGS: AMZN), which XLY holds.
With the U.S. dollar strengthening, currency risk is also a concern for many investors. However, foreign currencies and global consumer spending do not have a major effect on U.S. consumer discretionary sector, according to Goldsborough.