Consumer and retail sector exchange traded funds have been among the better performing areas of the market so far this year, but things could change if the Federal Reserve decides to hike rates.
Year-to-date, the Market Vectors Retail ETF (NYSEArca: RTH) advanced 8.4% while the SPDR S&P Retail ETF (NYSEArca: XRT) increased 6.1%. Meanwhile, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) rose 6.2% and First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca: FXD) gained 4.9% so far this year. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) added 1.6%. [Deflationary Pressures to Support Consumers, Retail ETFs]
For now, investors may capitalize on consumer sector momentum as an expanding economy fuels growth.
“The early part of a rate hike cycle should be beneficial to the consumer discretionary sector,” Pat O’Hare, chief market analyst at Briefing, said in a U.S. News article. “Higher rates are presumably the result of a pickup in economic growth that is flowing from higher levels of employment, which creates a stronger sense of job security, higher wage growth and increased lending activity, and that leads to higher levels of spending.”
We are currently witnessing improving jobs numbers, with the U.S. unemployment rate back down to 5.5% as of February, although wage growth has not really picked up yet. Interest remain near historical lows. Additionally, many expect the depressed energy prices to fuel consumer spending since cheaper fuel costs keep more money in American consumers’ wallets. [Consumer Discretionary ETFs Could Pick Up Steam]
Nevertheless, historical data suggests that discretionary and retail sectors could slow down after the Fed hikes rates.
“What happens during a period of rising rates is retail and consumer discretionary stocks sell off compared to the S&P 500,” Cowen & Co.’s head of sales trading David Seaburg warned on CNBC. “If you look at a historical chart of the S&P 500 versus consumer discretionary six months prior and six months following a rate hike, you can see that in the six months prior consumer discretionary stocks outperform and then rates move and the S&P 500 starts to outperform.”
Consumer Discretionary Select Sector SPDR
For more information on the consumer sector, visit our consumer discretionary category.
Max Chen contributed to this article.