Consumer discretionary exchange traded funds have been in the limelight in recent weeks. In fact, nearly all of the ETFs that all-time highs last Friday were consumer discretionary and retail ETFs with significant weights to Amazon.
With data supporting increased bullishness for consumer stocks and the related ETFs, investors should take a look at some of the sector’s smart beta offerings, including the PowerShares DWA Consumer Cyclicals Momentum Portfolio (NYSEArca: PEZ). PEZ is often overlooked in the consumer discretionary ETF conversation though there are reasons why this should not be the case.
By way of its index methodology, which focuses on price momentum and relative strength, PEZ has the flexibility to rotate out of a sector’s lagging industry groups and into the ones that are showing noticeable relative strength. [Momentum Rebound Lifts This ETF]
On that front, the good news is PEZ is currently lightly allocated to struggling airline stocks and the ETF’s auto components exposure is also small as its weight to high-flying Internet names, but that belies the opportunity set with PEZ.
“The ratio of US household debt-to-disposable personal income was at 102.5% at the end of 2014 (when figures were last available) – a level not seen since during the early 2000s. That’s down from 130% in 2007. 1 The fact that consumers are not under as much pressure to save or pay down debt bodes well for consumer spending. Consumers now have the capacity to borrow and spend if they so desire,” said PowerShares in a recent research note.
Household debt previously expanded at an average annualized rate of over 9% between 1945 and 2007 but topped out in 2007. Historically, household consumption has increased by 0.2% for every one percentage point increase in household debt. However, since the economy began picking up pace, household debt has increased at a much slower pace of less than 1% annualized. [Frugal Consumers Affect Discretionary ETFs]
PEZ differs from standard discretionary ETFs in that it is not home to some of the sector’s most familiar names such as Home Depot, Walt Disney (NYSE: DIS), Ford (NYSE: F) McDonald’s (NYSE: MCD) or cable providers.
Still, compressed margins and high valuations have kept some investors at bay when it comes to discretionary ETFs, but the margin situation is not as bad as some believe it to be.
“In addition, profit margins in the consumer discretionary sector of the S&P 500 Index have been above 6.5% in recent quarters, but have not shown much expansion since 2011.1 Fortunately, The bullish news for this sector lies in the fact that margins are high relative to the 1990s and 2000s, and a strong dollar has made the sourcing of goods cheaper. On balance, I expect the positives of the consumer sector to outweigh the negatives, but investors should also be wary of the risks,” according to PowerShares.
PowerShares DWA Consumer Cyclicals Momentum Portfolio
