CFRA Focus ETF: Consumer Discretionary Select Sector SPDR (XLY)

By Todd Rosenbluth, CFRA

The CFRA Focus ETF for September is Consumer Discretionary Select Sector SPDR (XLY), which earns our highest rating of Overweight. Our rating is based on a combination of holdings-level analysis and fund attributes, including the expense ratio, bid/ask spread and technical analysis. Overall, the fund earns favorable rating attributes for performance, risk and cost factors.

XLY is up 17% thus far in 2018 and has an impressive 19% annualized three-year total return as of August 27. However, this record provides little insight into where the fund is going, in our opinion, particularly as some of XLY’s largest constituents are being shifted out the consumer discretionary sector in late September as part of the GICS sector realignment.

Comcast (CMCSA), Disney (DIS) and Netflix (NFLX) are among the S&P 500 companies that will move to the Communications Services sector on September 28, 2018 along with information technology stocks Alphabet (GOOGL) and Facebook (FB) to join with AT&T (T) and Verizon Communications (VZ). However, what will remain inside XLY remains compelling to CFRA.

At nearly 25% of assets, (AMZN) is currently more than triple the size of the ETF’s next largest holding Home Depot (HD), and is a CFRA Buy recommendation. Tuna Amobi, a CFRA Equity Analyst, projects AMZN’s earnings per share to grow to $20.23 in 2019, up from an expected $15.24 in 2018, driven by sales growth and margin expansion. Amobi sees upside to AMZN’s third-quarter results due to back-to-school selling season on the heels of record sales during its recent 4th annual Prime day. In the second quarter, AMZN’s sales rose 39% and contributed to the better-than-expected earnings results.

Meanwhile, fellow CFRA Equity Analyst Ken Leon has a Buy recommendation on HD as he expects rising home prices to lead to increased demand for home improvement. Second-quarter earnings were stronger than expected aided by 8% sales growth and 8.6% sales per square foot growth. Leon forecasts these trends to persist in the second half of the year along with continued expense control and supply chain efficiencies. CFRA sees HD attractively valued on a relative P/E basis. From a risk considerations rating perspective, XLY further benefits as Home Depot earns an above-average A+ S&P Global Market Intelligence Quality Ranking.