The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), which tracks consumer discretionary names in the S&P 500 index, is already this year’s best performer among the nine sector SPDR exchange traded funds by a wide margins, but some market observers see more upside ahead for the already stout consumer discretionary space.
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. Add to that, only two the nine sector SPDRs have taken in more new assets this year than XLY.
XLY, the largest consumer discretionary ETF by assets, includes exposure to retail firms, restaurants, media companies, apparel and luxury goods companies, automobile manufacturers and leisure industries.
Retailers make up a large portion of the underlying holdings. E-commerce and greater mobile commerce usage has also been a big game changer in the industry, especially with more consumers using online sources like Amazon (NasdaqGS: AMZN), which XLY holds.
“Within the sector, the Internet and catalog retail industry has soared, thanks to popular stocks such as Netflix, Amazon and Expedia. But some of the biggest drags on the broader sector also come from the retail space, with names like Fossil, Michael Kors, Ralph Lauren and Gap among the worst performers year to date,” reports CNBC.
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. [Strong Finish Seen for Consumer Discretionary ETFs]
There are some catalysts for discretionary ETFs, such as XLY, including the rising minimum wage. Meanwhile, a growing segment of America is calling for higher minimum wages across the government after years of stalled efforts. The national minimum wage has been set at $7.25 per hour since 2009, and changes would require the support of the Republican-controlled Congress.
A number of research has pointed to improved economic conditions from higher wages. For instance, in a 2011 study by the Chicago Federal Reserve, the author found that for ever dollar increase in minimum wage, a worker’s household added $2,800 in new consumer spending over the following year.
Consumer Discretionary Select Sector SPDR
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.