The strong U.S. dollar has weighed on large-cap companies with overseas foreign exchange exposure, but small-cap consumer sector exchange traded funds may capitalize on improved growth at home.
For instance, ETF investors can use the PowerShares S&P SmallCap Consumer Staples Portfolio (NasdaqGM: PSCC) and PowerShares S&P SmallCap Consumer Discretionary Portfolio (NasdaqGM: PSCD) cover the consumer staples and consumer discretionary sectors from the S&P SmallCap 600 Index, respectively. Over the past year, PSCC rose 13.2% and PSCD increased 11.9%.
“Because of the strong dollar, you’re seeing a rotation out of the larger S&P constituents into smaller caps (that focus on the U.S. consumer),” Dan Veru, chief investment officer at Palisade Capital Management, said in a CNBC article.
For instance, year-to-date, investors pulled $61.2 million from the Consumer Staples Select Sector SPDR (NYSEArca: XLP) and the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) saw $588.1 million in outflows, according to ETF.com data.
XLP’s market capitalization includes 53.2% mega-caps, 37.8% large-caps and 8.0% mid-caps, compared to PSCC’s 68.8% small-caps and 31.2% micro-caps. XLY holds 35.8% mega-caps, 43.2% large-caps and 20.8% mid-caps, compared to PSCD’s 65.2% small-caps and 34.8% micro-caps.
The USD has been appreciating against a basket of foreign currencies as global central banks enact loose monetary policies to depreciate their local currencies. The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has increased 4.6% year-to-date and gained 14.9% over the past year. Some analysts argue that the stronger dollar environment would be more favorable for consumer sectors. [USD ETF Advances in Ongoing Currency War]
“Consumer-oriented companies are likely to see better earnings results. So far we’ve only heard from banks and wholesale firms,” Jack Ablin, chief investment officer at BMO Private Bank, said in the article.
Many argue that small-cap earnings that do business at home will benefit from the continued U.S. economic expansion. In contrast, earnings results from large companies like Microsoft (NasdaqGS: MSFT), Procter & Gamble (NYSE: PG) and Pfizer (NYSE PFE) have revealed that sales are taking a dive due to the appreciating U.S. dollar. [Strong U.S. Dollar Could Pressure S&P 500 Earnings, ETFs]
For more information on the consumer sector, visit our consumer staples category.
Max Chen contributed to this article.