After being a laggard in 2014, the consumer discretionary sector has roared back with vengeance in 2015. The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), the largest discretionary sector exchange traded fund, is up nearly 6% this year and was one of 10 discretionary or retail ETFs to hit all-times highs on Wednesday.
However, with the new highs for discretionary stocks and ETFs have come concerns that the sector is now richly valued. XLY sports a P/E ratio of 18.4 compared to 17.3 for the S&P 500. [Spending Needs to Support Lofty Consumer ETF Multiples]
Equal-weight exchange traded funds can help investors reduce some of the valuation concern surrounding discretionary stocks. For a pure play on that theme, investors can turn to theGuggenheim S&P Equal Weight Consumer Discretionary ETF (NYSEArca: RCD), the equal weight answer to XLY.
As an equal-weight ETF, the $169 million RCD offers only modest exposure to some of the discretionary sectors most richly valued stocks. For example, Netflx (NasdaqGS: NFLX), Amazon (NasdaqGS: AMZN) and Starbucks (NasdaqGS: SBUX) combine for just 4.1% of RCD’s weight. Light exposure to those high-fliers is not preventing RCD from delivering for investors this year. The ETF is up nearly 4% and was one of the 10 discretionary ETFs to hit an all-time high Wednesday. [Discretionary ETFs Could Rally]
“Equal weight indexes can provide investors with an alternative lens on market performance, particularly during times when high valuations may be a concern. Equal weight indexes break the link between a stock’s price and its weight within the index, which can be particularly useful for viewing certain sectors such as Consumer Discretionary in which a few large companies such as Nike or Starbucks can dominate index performance simply because of their size. Russell’s equal weight indexes spread company exposures evenly across the investment opportunity set, avoiding the over concentration that may occur in market cap weighted indexes,” said Russell Indexes Senior Research Director Tom Goodwin, PhD, in a recent note. http://www.russell.com/us/default.aspx
Investors looking to tap the discretionary sector via a broad market ETF should consider the newly minted PowerShares Russell 1000 Equal Weight Portfolio (NYSEArca: EQAL).
The new ETF offers investors an evolved approach to the prosaic equal-weight ETFs that currently populate the market. EQAL tracks the Russell 1000 Equal Weight Index, which applies an equal weight to nine sectors and then assigns an equal weight to each security from those sectors. [New ETF, New way to Eqaul Weighting]
EQAL allocates 11.6% of its weight to the discretionary sector and since no stock accounts for more than 0.3% of the fund’s weight, EQAL is far from vulnerable to single stock risk. The ETF has been a hit with investors. Just two months old, EQAL had $126.1 million in assets under management as of Feb. 24. For the week ending Feb. 24, investors poured $46.6 million into EQAL.
Guggenheim S&P Equal Weight Consumer Discretionary ETF
