The consumer discretionary sector and related exchange traded funds could benefit the most in an expanding economic environment, with the Federal Reserve gradually raising interest rates.
For broad consumer discretionary exposure, investors can turn to the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), which tracks consumer discretionary names in the S&P 500 index, making up 13% of the overall index on a market-cap-weighted basis, Todd Rosenbluth, director of ETF research at S&P Capital IQ, said in a research note.
The consumer discretionary sector is among the best performing areas of the market this year, with XLY up 12.8% year-to-date.
Sam Stovall, U.S. equity strategist for S&P Capital IQ, argues that the consumer discretionary sector will benefit from the improving employment numbers and could face limited impact from the incremental Fed fund rate hikes. Additionally, Standard & Poor’s Economics anticipates consumer spending to rise 3.3% in 2016 after a 3.1% increase in 2015. Meanwhile, the U.S. consumer sentiment index rose to 92.1 in mid-October, compared to September’s 87.2 reading.
Looking ahead, Stovall also pointed out that the consumer discretionary space is the only S&P 500 sector expected to generate double-digit EPS growth in the second half of 2015. The sector is also projected to see earnings grow 15% in 2015, compared to 9% for the broader S&P 500.
“In the third and fourth quarters of 2015, earnings estimates for S&P 500 specialty retail constituents are for 11% growth, with a forecasted 14% for all of 2016,” Rosenbluth said. “Investors are expecting even stronger growth from internet retail companies. The industry is expected to generate 43% and 45% in the final quarters of 2015, with 50% growth in 2016. Meanwhile, in the second half of 2015, media companies are forecasted to grow earnings by mid-single digits. However, investors are expecting earnings to accelerate to 14% growth in 2016.”
XLY includes a 24.8% tilt toward media, 20.0% to specialty retail and 15.6% internet & catalog retail.
Moreover, the sector is heading toward a seasonally strong period. Historically, consumer discretionary has been among the better performers during the November through April period since 1990, rising 10.7% on average, compared to the 7.1% gain for the S&P 500 index.