The month of December is normally a good time to get in on consumer
discretionary stocks thanks to people’s shopping spree in the
holiday season. Thus, the department stores, apparel stores, and
other retailers are all now front and center in business
headlines.
This year, the sector is experiencing tough holidays mainly due to
a difficult year-over-year comparison thanks to a shorter holiday
season due to fewer weekends between Thanksgiving and Christmas
this year. A leading provider of shopper analytics – ShopperTrak –
predicts 10% less holiday retail traffic than the previous
year.
Also, consumers are presumably in two minds about where the economy
is heading in the near future. A Likely Fed taper in the near term
might have made them cautious about their discretionary spending.
However, there is still plenty of reason to be cheerful about this
space this holiday season, including some recent data points.
Bullish Sector View
The discretionary sector has done quite well in Q3 with a beat
ratio of 79.3% for earnings and 31.0% for revenues. Earnings beat
ratio was in fact the fourth highest among 16 sectors comprising
the S&P 500 index (as per the Zacks Methodology).
Though softened from the Q2 level, total earnings for the sector
went up 11.9% on 4.6% higher revenues in Q3. Next year, the
consumer discretionary sector is expected to expand 15.3% on the
bottom line and 5.5% on the top line. Growth projections are higher
than most other sectors forming the S&P 500 index.
Consumer confidence is surely faltering right now, but has improved
remarkably from what it was two years ago. Also, a recent report
said that the consumer sentiment index in December bested the
forecast and jumped to the highest level (82.5) in five months.
Investors should note that consumer discretionary does not comprise
only retail. Restaurants, hotels, leisure services and several
other home appliances segment account for a major slice of the
sector which are displaying better signs of healing.
As far as GDP growth is concerned, the revised Q3 data (3.6%) was
quite overwhelming given the unsteady global economic backdrop.
Barring the latest jump in initial jobless claims, overall job
market tone and ISM readings carried out the winning momentum. This
should actually aid the consumer discretionary sector in the New
Year (read: Is This ETF a Better Bet in the Consumer Space?).
Small-Caps are Doing Better
If investors want to get in on this uptrend, small-caps should be
an intriguing option. Small-caps have the potential to offer good
returns in an up trending market and play mostly in the domestic
arena. With Taper fears building up for next year, we advise
investors to make the most of the inherent U.S. economic growth
rather than being exposed to foreign lands which are highly
vulnerable to the taper aftershock (read: 3 Small Cap ETFs Leading
the Market Higher).
Notably, the S&P SmallCap Consumer Discretionary index added a
whopping 41.4% YTD return (as of December 11, 2013) against a 32.9%
rise in S&P Small Cap 600 index and a 21.9% gain in the S&P
500 index. Given this bullish trend, a look at some of the top
ranked ETFs in the small-cap consumer discretionary space could be
a good way to target the best of the segment.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box or asset class (see all the Zacks ETF Categories here).
Our proprietary methodology also takes into account the risk
preferences of investors. ETFs are ranked on a scale of 1 (Strong
Buy) to 5 (Strong Sell) while they also receive one of three risk
ratings, namely Low, Medium or High.
The aim of our models is to select the top ETFs within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, the Zacks ETF Rank reflects the expected return of an
ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio
in the small-cap discretionary space, we have taken a closer look
at the top ranked PSCD. This ETF has a Zacks ETF Rank of 1 or
‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed
below:
About PSCD
S&P SmallCap Consumer Discretionary
Portfolio (PSCD) which made its debut in 2010 and now has
$115.5 million in AUM, is invested in 101 securities. The product
puts around one-fourth of its total assets in the top 10 holdings,
suggesting little concentration risk.
Nevertheless, assets are well spread out across the components and
none of the stocks holds more than 3.83% of the assets. Brunswick
Corp. (3.83%), Fifth & Pacific Co. (3.69%) and Wolverine (3.0%)
hold the top three positions in the basket.
As far as industries go, Specialty retail (29%) takes up the top
spot followed by Apparel (16%) and Restaurants (15%).The fund is
quite cheap in the consumer discretionary equities ETF space with
29 bps of annual fees which is pretty lower than the average
expense ratio (52 bps) of the space.
PSCD is a nice blend of growth and value stocks with equal
exposure. Notably, the fund has almost all its coverage in the U.S.
which clearly explains why it can be a wise bet in a global
slowdown (see more in the
Zacks ETF Center).
The fund’s performance this year has been stellar, adding a little
over 40% in the YTD time frame (as of December 11). However, higher
return comes at the expense of ‘high’ risk outlook, though this ETF
has certainly been a star performer in 2013.
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PWRSH-SP SC C D (PSCD): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
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