McDonald’s (MCD) is another remaining XLY constituent that CFRA considers undervalued and low risk. MCD’s second-quarter global comparable sales rose a relatively healthy 4%, according to Amobi, extending a multi-year streak of above-industry average growth. Looking forward, he sees the benefits of recent menu price increases and further expansion of operating margin following the completion of re-franchising. Relative to restaurant peers and its historical P/E, the stock is attractively valued, according to CFRA. In addition, MCD earns an above-average A Quality Ranking.
Lowe’s (LOW), Nike (NKE), Starbucks (SBUX) and TJX Companies (TJX) are other stocks that will gain in relative stature in the portfolio following the GICS changes. All earn B+ or higher Quality Rankings. Overall, XLY earns favorable rating inputs for its STARS and Quality Rankings.
At the fund level, the ETF’s modest 0.13% expense ratio and tight $0.01 bid/ask spread contribute favorably. XLY trades 4.5 million shares on a daily basis. From a technical perspective, XLY is exhibiting bullish tendencies, trading well above its 200-day moving average.
Despite its strong performance this year, the $15 billion fund has a surprising $25 million of net outflows year-to-date through August 27 according to etf.com. Despite positive performance and appealing holdings, investors have not added assets or focused on this ETF. We think they should.
CFRA thinks XLY warrants further attention in September as the low-cost portfolio holds many stocks that we view favorably. However, investors need to be mindful that ETFs are not static and the constituents can change. We think the GICS sector realignment at the end of month, and the removal of large positions, support a holdings-based and not a performance-based assessment.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.