S&P Likes XLY, Tepid on Rival ETFs

For all the chatter regarding a slowing U.S. economy, the consumer, two-thirds of this country's GDP, has been strong this year. Consumer strength is all the more impressive when factoring in a tight presidential election and the possibility of a fiscal cliff. Even with those issues in mind, the consumer has chugged along, helping boost the fortunes of consumer discretionary ETFs in the process. Although some of these funds have run far enough fast enough that calling them overbought is not entirely inaccurate, the holiday shopping season will be here before investors know it and that could provide another lift to discretionary ETFs. "In this country, most consumers prefer to spend rather than save, and this tends to ring even more true over the holiday season," S&P Capital IQ said in a research note. "The International Council of Shopping Centers (ICSC) expects holiday chain store sales to increase 3.0%. The National Retail Federation (NRF), which includes online sales in its estimate, is projecting a 4.1% increase for the traditional November-December time period. This is higher than the 10-year average holiday sales increase of 3.5%, and is the most optimistic forecast that the NRF has released since the recession." As S&P Capital IQ notes, retail stocks follow the broader market higher in the October through March time frame with March and February ranking as two of the best three months in which to own retail names. "Given the historical data, it appears that now is a relatively good time to shop for some retail stocks. Of course, past performance is no guarantee of future results, and if the holiday shopping season falls short of expectations, Q4 results may disappoint (and the stocks could suffer)," the firm said in the note. In the note, S&P rated three discretionary ETFs, applying an Overweight rating to the Consumer Discretionary Select Sector SPDR XLY and Marketweight ratings to the iShares Dow Jones US Consumer Services Index Fund IYC and the Vanguard Consumer Discretionary ETF VCR. With $3.94 billion in assets under management and an expense ratio of 0.18 percent, XLY is the largest and least expensive discretionary ETF on the market. XLY has outperformed both its Lipper peers and the S&P 500 over the past 1-year, 3-year, 5-year and 10-year periods, with significant outperformance versus its peers over the 3-year period (19.9% vs. 16.2%), according to S&P. XLY's top-10 holdings include Comcast CMCSA, McDonald's MCD, Home Depot HD and Amazon AMZN. The Marketweight-rated iShares Dow Jones U.S. Consumer Services Sector Index Fund is home to $320.6 million in AUM and charges 0.47 percent per year. Top-10 holdings in that ETF include Wal-Mart WMT, McDonald's, Home Depot and Amazon. IYC is up 23.1 percent year-to-date. The Vanguard Consumer Discretionary is only slightly more expensive than XLY with fees of 0.19 and its top-10 holdings are similar. Those include Comcast, McDonald's, Home Depot, Amazon and Walt Disney DIS. Over the past five years, XLY has outpaced VCR, but since early 2004, the Vanguard fund has come out on top. For more on discretionary and retail ETFs, click here.