PSCD Invesco S&P SmallCap Consumer Discretionary ETF Trust II

As we all know, retail sales normally pick up on Black Friday, but this time retailers are displaying a rally ahead of Good Friday as well.  U.S. retailers rejoiced the departure of the harsh winter in March as the group clocked a better-than-expected 1.1% growth in retail sales. This marked the largest gain since September 2012, as per Bloomberg. Prior to this, retail sales nudged up 0.7% (revised) in February and fell 0.6% in January.

Among the 13 categories, which include auto dealers, furniture and clothing stores, 10 categories saw a move higher following the slump. This year a severe winter locked most Americans inside their homes making it difficult for them to shop. 

Also, the chilling weather in most parts of the country led to high heating bills – a drag on low-income earners--  while weakened stock markets and sluggish home prices hit high-income consumers too (read: Unpopular Sector ETFs to Start 2014). 

The onset of spring and the release of pent-up demand are now leading to optimistic retail numbers. The retail resurgence came at the right time when the market was in desperate need of a catalyst after being bogged down by the momentum sell-off and Tech-Biotech slide (read: The Momentum Stock Crash Puts These ETFs in Focus).

Investors should note that retail sales are considered as the barometer of U.S. economic growth. Thus, such a spike in retail numbers can indicate economic recovery. Moreover, consumer confidence surged in April to the highest level in about 9 months. 

According to the National Retail Federation’s (NRF) monthly economic review published on Feb 6, 2014, retail industry sales (excluding automobiles, gas stations and restaurants) are projected to grow 4.1% in 2014.

In the current scenario, some consumer discretionary ETFs are well poised to benefit from this bullish trend ahead of Good Friday. The following four ETFs have top Zacks ETF Ranks, suggesting a solid run in the coming months as well.

In fact, this buoyant data provided an impetus for the broader U.S. market as evident from the 0.79% gain registered by the SPDR S&P 500 (SPY). Any of these could be better plays in the recovering economy and may continue to outperform in 2014 (see: all the Consumer Discretionary ETFs here): 
 
Dynamic Leisure & Entertainment Portfolio ETF (PEJ)

PEJ seeks to tracks the Dynamic Leisure and Entertainment Intellidex Index. PEJ invests about $184.1 million of assets in 30 holdings. Stocks like Marriott International, Walt Disney and Hilton Worldwide Holdings are some of its top holdings, each with more or less 5% share in the basket.
 
The fund charges a relatively high expense ratio of 69 bps a year. PEJ added about 0.71% in the key trading sessions and currently has a Zacks ETF Rank #1 (Strong Buy) with a medium 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 $823.0 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 137 stocks that are invested across various market spectrums. Each security holds less than 1.35% of assets. Specialty Retail is the top sector with more than one-fifth allocation, followed by Media (13.2%) and Hotels, Restaurants and Leisure (13%).

The ETF has added over 0.55% following the release of retail sales data. FXD has a Zacks ETF Rank of 1 with a medium risk outlook.

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 104 securities in its basket that are widely spread across each component as none of these holds more than 1.32% of total assets. The fund has been able to manage assets worth $810.9 million.

In terms of sector holdings, Apparel Retail takes the top spot with one-fourth share of the basket while Specialty Stores and Automotive Retail round off to the next two spots. The ETF charges 35 bps a year in fees.
XRT gained about 0.49% in the key trading session and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a medium risk outlook.

PowerShares S&P SmallCap Consumer Discretionary (PSCD)

PSCD is a compelling choice for investors looking for a targeted bet in the small cap space. The fund tracks the S&P Small Cap 600 Capped Consumer Discretionary Index, giving investors exposure to U.S. consumer discretionary companies.
 
The fund holds a basket of 100 stocks and is relatively cheaper, charging investors 29 basis points as annual fees. The top three holdings of the fund are Live Nation Entertainment Inc (2.90%), Wolverine World Wide Inc. (2.67%) and Buffalo Wild Wings Inc. (2.67%).
 
The fund was up 0.49% yesterday. The trend is expected to continue at least in the short run, given the fact that the fund has a favorable Zacks ETF Rank of 2 with a high risk outlook (see 3 Consumer Discretionary ETFs Set to Surge).
 

 
Bottom Line

From the chart depicted above, it is evident that retail or consumer discretionary ETFs took a beating in the past month. All four above-mentioned ETFs lost in the range of 4.6% to 7.2% as against just 0.8% loss noticed in SPY. This was largely because of high beta pain and record chills in the U.S.

However, this huge selling pressure should make the space reasonably valued. In fact, popular retail ETF XRT currently trades at forward P/E multiple of 17.25 times while SPY trades at a forward P/E multiple of 15.55. On a P/B basis as well, XRT and SPY are not much different. XRT’s P/B ratio stands at 2.76 while SPY’s P/B ratio is 2.48 (as of April 14, 2014).  

Investors should also note that both retail/wholesale and consumer discretionary sectors will likely log double digit growth rate this year and the next. Once the high-beta pain heals, we believe the above-mentioned consumer ETFs are set to gain in the second quarter.

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FT-CONSUMR DIS (FXD): ETF Research Reports
 
PWRSH-DYN LE&EN (PEJ): ETF Research Reports
 
PWRSH-SP SC C D (PSCD): ETF Research Reports
 
SPDR-SP RET ETF (XRT): ETF Research Reports
 
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