Time to Warm to Discretionary ETFs

As if it has not been for most of the past three years. Over that time, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) has been the best performer among the nine sector SPDRs by a wide margin.

Since October 2010, XLY has bested the Health Care Select Sector SPDR (NYSEArca: XLV) by over 800 basis points. XLY is up nearly 90% over the past three years and 35.2% just this year. Runs like that mighy imply discretionary stocks are running on fumes when in reality the opposite may be true. [Consumer Discretionary ETFs Have Room to Run]

After all, the holiday shopping season is right around the corner and discretionary stocks typically shine in the fourth quarter and into the early part of the new year.

“The International Council of Shopping Centers (ICSC) is expecting holiday chain store sales to increase by 3.4%. The National Retail Federation (NRF), which includes online sales in its estimate, is projecting a

3.9% increase for the traditional November-December time period,” according to a new research note by S&P Capital IQ. “These projections are modestly higher than the 10-year average holiday sales increase of 3.3%, and would also be an acceleration from the 3.2% pace in nominal retail sales growth that we had year-to-date through September (excluding motor vehicles and parts). While a 3%-4% nominal sales pace is nothing to write home about, these forecasts do not project the holiday season being a total dud, either.”

S&P also highlighted seasonal trends that favor ETFs such as XLY, noting “retail stocks – like stocks in general – tend to fare best from October to March. Using data compiled since 1990, the best three months for retail stocks on an absolute basis have been March (+3.70%), November (+3.21%) and May (+1.78), while the three worst have been August (-0.78%), June (-0.62%) and September (-0.50%).” [ETFs for Buy in November]