A Timely ETF For September

With Amazon.com Inc. AMZN ascending to the rarefied air that is the $1 trillion market capitalization club, previously occupied by just Apple Inc. AAPL, examining cap-weighted consumer discretionary exchange-traded fund is timely.

As Amazon's market value increases, so does it dominance in ETFs such as the Consumer Discretionary Select Sector SPDR XLY. XLY is the largest consumer discretionary ETF by assets.

What Happened

As of Aug. 31, prior to Amazon reaching a market value of $1 trillion, XLY's exposure to the e-commerce giant was 24.45 percent. That makes XLY an appropriate choice as CFRA Research's focus ETF for September.

“XLY is up 17% thus far in 2018 and has an impressive 19% annualized three-year total return as of August 27,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “However, this record provides little insight into where the fund is going, in our opinion, particularly as some of XLY’s largest constituents are being shifted out the consumer discretionary sector in late September as part of the GICS sector realignment.”

Why It's Important

Media stocks represent just over 17 percent of XLY's weight. That group includes familiar names such as Dow component Walt Disney Co. DIS and Netflix, Inc. NFLX. However, those stocks will soon leave XLY's roster for the communication services sector. Amazon will remain a consumer discretionary stock.

Underscoring Amazon's dominance in XLY and rival cap-weighted consumer discretionary ETF is this nugget: the stock's current weight in XLY is more than triple the weight assigned to Home Depot Inc. HD, XLY's second-largest holding.

“Tuna Amobi, a CFRA Equity Analyst, projects AMZN’s earnings per share to grow to $20.23 in 2019, up from an expected $15.24 in 2018, driven by sales growth and margin expansion,” said Rosenbluth. “Amobi sees upside to AMZN’s third-quarter results due to back-to-school selling season on the heels of record sales during its recent 4th annual Prime day. In the second quarter, AMZN’s sales rose 39% and contributed to the better-than-expected earnings results.”

What's Next

XLY has some other favorable traits.

“At the fund level, the ETF’s modest 0.13% expense ratio and tight $0.01 bid/ask spread contribute favorably,” adds Rosenbluth. “XLY trades 4.5 million shares on a daily basis. From a technical perspective, XLY is exhibiting bullish tendencies, trading well above its 200-day moving average.”

CFRA has an Overweight rating on XLY.

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