The PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEArca: PEJ) qualifies as a consumer discretionary exchange traded fund and a good one at that.
This year, the $189.9 million PEJ, which does an admirable of mixing large-, mid- and small-caps among its 30 holdings, has jumped 42%. That is roughly 500 basis points better than traditional discretionary ETFs that focus on the likes of Amazon (NasdaqGM: AMZN), Nike (NYSE: NKE) and cable providers.
One reason why PEJ has been a standout performer in a standout sector is its exposure to high-flying casual dining and fast food chains. When we highlighted the ETF a month, PEJ had an almost 6% weight to Chipotle (NYSE: CMG), at the time the only noteworthy weight among ETFs to the over $500 stock. [An ETF for Burritos, Coffee and Donuts]
In early November, Starbucks (NasdaqGM: SBUX), Buffalo Wild Wings (NasdaqGM: BWLD) and Krispy Kreme Doughnuts (NYSE: KKD) combined for almost 12% of PEJ’s weight.
PEJ has retreated a bit since late November and although the ETF is trading modestly higher Thursday, it is down 2% over the past week as unions and fast food workers press their employers for higher wages. Fast food workers want the right to unionize and a wage of at least $15 per hour, more than double the national minimum wage.
It can be argued the workers have a point. Due to the slight wages paid by the 10 largest fast food chains, many workers have to claim some form of government assistance to make ends meet. Taxpayers foot that bill. For example, it is estimated that McDonald’s (NYSE: MCD), privately held Subway and Berkshire Hathaway’s (NYSE: BRK-A) Dairy Queen cost U.S. taxpayers about $1.9 billion combined last year.
Wages at establishments like Chipotle and Starbucks are, in many states, better than at McDonald’s or Wendy’s (NYSE: WEN), but the reality is no one is getting rich making burritos or lattes.
Back to PEJ and why its recent retrenchment at the hands of fast-food protests may represent a buying opportunity. Sonic (NasdaqGM: SONC), Domino’s Pizza (NYSE: DPZ), Dunkin’ Brands (NasdaqGM: DNKN) and Wendy’s, all of which are among the 10 fast food chains costing U.S. taxpayers the most money, combine for over 10% of PEJ’s weight.
But, and this is an important “but,” PEJ qualifies as a smart beta ETF. The ETF’s holdings are selected based on “price momentum, earnings momentum, quality, management action, and value,” according to PowerShares. [Some Smart-Beta ETFs Draw Praise]
Translation: Say the McDonald’s is forced to pay its workers $15 an hour, which would mean the same would probably apply to all of the aforementioned names. That would likely be bad news for the stocks, but those names would either see reduced weights in PEJ or be removed from the ETF altogether at the quarterly rebalance.
As it is, Chipotle is no longer in PEJ. More importantly, just two restaurant stocks – Starbucks and Sonic – are found among the ETF’s top-10 holdings. In other news regarding stocks no longer residing in PEJ is Krispy Kreme and that is good news because the shares are down 23% this week. And more important than that are the stocks that currently dominate PEJ.
That would be Las Vegas Sands (NYSE: LVS), Wynn (NasdaqGM: WYNN), Time Warner (NYSE: TWX), Walt Disney (NYSE: DIS) and Priceline (NasdaqGM: PCLN). Sands and Wynn combine for 10.3% of PEJ’s weight and that is a good as the former hit a new 52-week high Thursday and the latter is close to doing the same.
PowerShares Dynamic Leisure and Entertainment Portfolio
