ETF Trends
ETF Trends

The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), which tracks consumer discretionary names in the S&P 500 index, was last year’s best performer among the nine sector SPDR exchange traded funds by a wide margin. However, previously high-flying discretionary stocks have struggled to start 2016 and traders are noticing.

Rich Ross of Evercore ISI told CNBC XLY has been driven higher by the likes of Amazon (NasdaqGS: AMZN), Walt Disney (NYSE: DIS) and Home Depot (NYSE: HD), “but problems in the retail space could actually drag down the broader sector heading into 2016, Ross said.

The consumer discretionary 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.

CNBC noted a bearish trade where someone spent $6.5 million on a bet that the ETF will fall as much as 18 percent by the middle of the year. Specifically, that trader closed an existing bearish position in order to purchase 30,000 of the June 69/61 put spreads for $2.10.

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.

However, to start the new year, investors have displayed a preference for more conservative consumer staples names, such as those found in the Consumer Staples Select Sector SPDR (NYSEArca: XLP), over discretionary equivalents. A rising staples/discretionary ratio is seen as a potential warning sign for the broader market.

The quick explanation of the staples/discretionary ratio is that investors, excluding those that want to see equities fall, want to see the ratio falling because that means markets are favoring the higher beta discretionary sector over its staples counterpart.

For a good portion of the time since the March 2009 market bottom, the XLP/XLY has been cooperative and conducive to increased risk appetite, but there have been periods when the ratio has signaled reduced risk was the way to go and that could be the case again now. [Bad News From Consumer ETFs]

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.