PEJ Invesco Leisure and Entertainment ETF

The passing winter has finally cheered up the markets. The latest job data has topped the consensus estimate, manufacturing readings came in higher than expected, and the geopolitical tension between Russia and Ukraine seems to have taken a brief pause.

If these are not enough, consumer confidence in the U.S. inched up in February on a sequential basis and surpassed the median estimate. All these have brought a breath of fresh air into the consumer discretionary sector which was dampened by a harsh winter.

Continued improvement in sentiment hints at the potential pick up in spending as soon as spring arrives. This year a severe winter locked most Americans inside barring them from shopping.

Also, the sub-zero temperatures almost all over the country led to high heating bills which were a drag on low-income earners, while plunging stock markets and sluggish home prices hit high-income consumers (read: Unpopular Sector ETFs to Start 2014). 

In fact, per a Sterne Agee analyst, higher home heating bills could restrict consumer spending “well into April”. For this reason, consumer discretionary ETFs were badly punished in the first two months of the year as investors fled the space.

However, the scenario seems to have taken a turn for better as the economy is on the verge of crossing this seasonal hurdle and the sector should not look behind. Per a U.S. economist at BNP Paribas, ‘consumer spending will continue on same pace and grow modestly throughout the year.”

From an earnings point of view, the sector is displaying a fair trend with 51.6% of the companies beating on the bottom line and 54.8% surpassing the top line so far. The consumer discretionary sector falls in the top 7 S&P sectors out of 16 that are likely to report double-digit earnings growth this year and in the next, as per the Zacks Earnings Trend.  In fact, the expected yearly earnings growth for the sector will likely be the second best.

Investors should note that consumer discretionary space does not comprise only retail. Restaurants, hotels, leisure services and several other home appliances segments account for a major slice of the sector which are also displaying signs of healing.

The trend has not caught the attention of investors as well with the biggest ETF in the space Consumer Discretionary Select Sector SPDR Fund (XLY) amassing $223.8 million of assets to kick off March. Most of the ETFs in the space provided higher returns than the broader market fund SPDR S&P 500 ETF (SPY).

Given this bullish trend, a look at some of the top ranked ETFs in the consumer discretionary space could be a good way to target the best of the segment (read: Time to Bet on This Small Cap Consumer ETF).

SPDR S&P Retail ETF (XRT)

This product targets just the retail corner of the broad consumer space by tracking the S&P Retail Select Industry Index. In total, the fund holds 103 securities in its basket that are widely spread across each component as none of these holds more than 1.48% of total assets. The fund has been able to manage assets worth $596.0 million.

In terms of sector holdings, apparel retail takes the top spot at one-fourth share in the basket, while specialty stores and automotive retail round off to the next two spots. The ETF charges 35 bps a year in fees (read: 3 ETFs to Buy on Encouraging Retail Stock Earnings).

XRT has gained 8.14% over the past one month and has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘High’ risk outlook.

Dynamic Leisure & Entertainment Portfolio ETF (PEJ)

PEJ seeks to track the Dynamic Leisure and Entertainment Intellidex Index. PEJ invests about $207.4 million of assets in 30 holdings. Hot stocks like Tripadvisor, Chipotle and Walt Disney are some of its top holdings each having more or less 5% share in the basket.
 
The fund charges a relatively high expense ratio of 69 bps a year. PEJ added about 7.67% in the last one month (as of March 10, 2014) and currently has a Zacks ETF Rank #1 (Strong Buy) with ‘High’ risk outlook.
 
First Trust Consumer Discretionary AlphaDEX Fund (FXD)

This is one of the more popular and liquid ETFs in the consumer space with AUM of $870 million and an expense ratio of 0.70%. The fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks (read: 3 Cyclical ETFs for an Improving Economy).

This approach results in a basket of 134 stocks that are invested across various market spectrums. Each security holds less than 1.57% of assets. Specialty retail is the top sector with nearly one-fifth allocation, followed by media (13.35%), and hotels, restaurants & leisure (12.10%).

The ETF has added over 6.91% over the past month. FXD has a Zacks ETF Rank of 1 with a ‘High’ risk outlook.

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FT-CONSUMR DIS (FXD): ETF Research Reports
 
PWRSH-DYN LE&EN (PEJ): ETF Research Reports
 
SPDR-CONS DISCR (XLY): ETF Research Reports
 
SPDR-SP RET ETF (XRT): ETF Research Reports
 
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