Consumer Discretionary ETFs Breakout To New Highs

The consumer is back. At least that's what prices of consumer goods and services stocks are indicating this week.

The Consumer Discretionary Select Sector SPDR XLY recently broke out to new highs on the back of strong quarterly results from Home Depot HD. This consumer-oriented fund houses 87 large-cap stocks that include retail, media, hotel, automobile and luxury goods manufacturers. 

Home Depot is one of the top five holdings in XLY, with Walt Disney Company DIS holding the top spot in this market-cap weighted index. Both companies have surged recently on positive financial results and other indications of consumer behavior.

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These stocks tend to be closely watched for sensitivity to economic cycles. XLY has more than $6 billion in total assets and charges an expense ratio of 0.16 percent.

So far this year, this ETF has gained just 2.47 percent compared to the 7.6 percent gain in the SPDR S&P 500 ETF SPY.

Consumer discretionary stocks have largely struggled this year as investors have rotated into defensive value sectors such as energy, utilities and consumer staples companies. This has led many to believe that a slowdown in consumption would ultimately lead to a breakdown in the markets.

The recent surge in XLY back above its intermediate and long-term moving averages, in addition to hitting new highs, may provide an indication that this rally has further to run.

Other ETFs that surged on the Home Depot announcement include the SPDR Homebuilders ETF XHB and the SPDR S&P Retail ETF XRT. These funds provide narrower industry focuses on home improvement companies and traditional brick-and-mortar retail stores. Both have also struggled to stay above the flat line in 2014 amid concern for tepid growth.

The next several weeks will be a critical test as to whether these ETFs can sustain this recent momentum or if these gains will be short lived. It goes without saying that during these unpredictable summer months, nearly anything can happen.