Going Shopping With Consumer Discretionary ETFs

The healthcare sector has rebounded enough in recent days to put the Health Care SPDR (ETF) XLV back into the group of two sector SPDR exchange-traded funds that are sporting year-to-date gains.

In the case of XLV, that ETF's 2015 gains are modest at 1.1 percent heading into Tuesday. Supportive economic data has helped propel the Consumer Discretionary SPDR (ETF) XLY to a year-to-date gain of 7.8 percent, easily making the largest consumer discretionary ETF the leader among the nine SPDRs.

On Monday, S&P Capital IQ upgraded its recommendation on the consumer discretionary sector, citing “a combination of macroeconomic, fundamental and seasonal factors. Consumer discretionary joins health care and telecom services as overweighted sectors, relative to the S&P 500 index.”

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Indeed, October is a fine time to consider XLY; since 1999, the first full year of trading for the sector SPDR suite, the discretionary ETF has averaged positive returns, while only trailing the Technology SPDR (ETF) XLK on an average basis during the tenth month of the year. Interestingly, October is the only month in which XLY ranks among the top two sector SPDRs.

Sector Catalysts

“Sam Stovall, US equity strategist for S&P Capital IQ, thinks the sector can benefit from a low unemployment rate and should face a minor impact from small and well-telegraphed Fed funds rate increases. Further he points to Standard & Poor's Economics forecast that consumer spending is projected to increase 3.3 percent in 2016, up from 3.1 percent expected in 2015,” said S&P Capital IQ in the note.

Year-to-date, just 121 S&P 500 member firms, less than a quarter of the benchmark U.S. index, are up at least 10 percent, but several of those names hail from XLY and the consumer discretionary sector.

XLY Allocations

Those double-digit gainers include Amazon.com, Inc. AMZN, Delphi Automotive PLC DLPH, Darden Restaurants, Inc. DRI, Lowe's Companies, Inc. LOW, Netflix, Inc. NFLX and Starbucks Corporation SBUX.

Amazon is XLY's largest holding at a weight of just over 9 percent, while Starbucks and Lowes are also top 10 holdings in the ETF combining for 6.7 percent of the ETF's weight. At a time when S&P 500 earnings growth is expected to be lethargic, investors might want to turn to XLY for some added earnings juice.

The Sector

“Stovall also noted that the consumer discretionary sector is the only S&P 500 sector projected by Capital IQ consensus to generate double-digit EPS growth in the second half of 2015. Meanwhile, earnings are forecasted to grow 15 percent in 2016, much stronger than the 10 percent for the S&P 500 index,” said S&P Capital IQ.

“Lastly, Stovall highlighted that historically the sector has been among the better performers during the November-April period since 1990. The sector rose on average 10.7 percent, ahead of the 7.1 percent for the S&P 500 index.”