After ranking at or near the top on the list of top-performing sector and industry exchange traded funds last year, consumer discretionary ETFs have struggled out of the gate in 2014. Even with the benefit of impressive bounces off their Feb. 3 lows, some well-known discretionary ETFs are still in the red year-to-date.
Early year struggles do not mean all is lost for discretionary ETFs, but investors considering these funds should be aware of important differences. For example, the Comcast’s (NasdaqGM: CMCSA) recently announced mega acquisition of rival Time Warner Cable (NYSE: TWC) was thought to be a potential catalyst for discretionary ETFs.
In reality, a scant number of discretionary ETFs have decent exposure, and that is stretching things, to both stocks. The iShares US Consumer Services ETF (NYSEArca: IYC), as one example, allocates almost 7% of its combined weight to those two stocks, hardly enough to move the fund’s needle. [Time to Warm to Discretionary ETFs]
Investors should also consider the length of the discretionary sector’s out-peformance of the broader market. Consumer discretionary stocks have outperformed the S&P 1500 in each of the past six calendar years through 2013, according to S&P Capital IQ.
However, it is not always the same sub-industries providing leadership.
“In 2013, Internet Retail and Movies & Entertainment were among the better performers in the sector, but in 2012 it was Homebuilders and Cable & Satellite companies that were key drivers to the overall sector’s success. It’s up to the investor to determine whether to choose a diversification or a thematic strategy, but thanks to ETFs, there are lots of choices,” said S&P Capital IQ in a recent research note.
The research firm has an overweight rating on the largest discretionary ETF, the Consumer Discretionary Select Sector SPDR(NYSEArca: XLY). The $5.2 billion XLY was the top performer among the nine sector SPDR ETFs in 2013. XLY’s top three holdings, which combine for over 19% of the fund’s weight, are Comcast, Amazon (NasdaqGM: AMZN) and Dow component Walt Disney (NYSE: DIS).
S&P Capital IQ has a five-star rating on shares of Disney and a four-star rating on Comcast. Although XLY is up 1.6% in the past week, it is still down 2% this year. [Cyclical Sectors Could Lead Again in 2014]
The $191 million PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEArca: PEJ), which was one of last year’s best sub-industry discretionary ETFs, draws a marketweight rating from S&P Capital IQ.
PEJ is not cap-weighed and at times has benefited from its exposure to casual dining and coffee stocks, among others. However, the ETF is currently heavy on travel and leisure stocks as Wynn Resort (NasdaqGM: WYNN), Disney, Las Vegas Sands (NYSE: LVS) and Priceline (NasaqGM: PCLN) combine for over 22% of the ETF’s weight. [A Discretionary ETF’s Well-Timed Restaurant Exposure]
PEJ is down just 0.44% year-to-date. S&P Capital IQ also has a marketweight rating on the $952.7 million SPDR S&P Retail ETF (NYSEArca: XRT).
Although XRT offers exposure to 11 retail sub-sectors, it allocates nearly 26% of its weight to apparel retailers. That group has proven vulnerable to the January decline in retail sales data, which some market observers blamed on frigid weather across much of the U.S. XRT’s exposure to retail apparel names is an important factor to consider because the first quarter is typically a good time to own those stocks, but the group has not delivered for investors to this point in 2014.
SPDR S&P Retail ETF
