ETF Showdown: Discretionary Dual

The alleged economic recovery has been anemic at best and the U.S. unemployment rate remains far too high. Still, the U.S. consumer, which contributes two-thirds of this nation's GDP, has been pretty resilient. On Wednesday, the Commerce Department said retail sales showed no significant increase. On the other hand, there was no big drop. The American Express Spending & Saving Tracker shows 21% of Americans plan on increasing their spending over the next six months while 43% will maintain current spending levels. Not great, but certainly better than the alternative. Consumer spending rose more than expected in July, so maybe there's something to looking at consumer discretionary ETFs now. We'll oblige with an ETF Showdown that pits the boss of consumer discretionary ETFs, the Consumer Discretionary Select Sector SPDR XLY, and the PowerShares Dynamic Leisure and Entertainment Portfolio PEJ. The Consumer Discretionary Select Sector SPDR is old by the standards of most ETFs. It made its debut in 1998 and has amassed more than $1.9 billion in assets under management in that time. It holds more than twice as many stocks (nearly 80) than the PowerShares Dynamic Leisure and Entertainment Portfolio, which holds 30. XLY features an tiny expense ratio of 0.2%, vastly undercutting the 0.63% offered by PEJ. PEJ, which made its debut in 2005, has about $49 million in AUM, so there's another notch for the SPDR fund. Looking at the vitals, XLY should be the superior offering, but there's more to this showdown. Investors looking for a more conservative play on the U.S. consumer should opt for XLY. However, PEJ's higher allocations to growth stocks and big brand discretionary stocks is preferable. Chipotle CMG, Starbucks SBUX, Priceline PCLN, McDonald's MCD and Yum! Brands YUM account for over 25% of PEJ's weight. Add in Wynn Resorts WYNN and you've got over 30% of the ETF's weight. Yes, all those names are found in XLY, but they represent just 16% of that ETF's allocation. We also like the fact that Panera Bread PNRA and Buffalo Wild Wings BWLD along with the gaming group figure more prominently in PEJ than they do in XLY. Year-to-date, XLY's conservative posture has helped it outperform PEJ by about 5%, but focusing on potential, we're crowning PEJ as the winner of this showdown. When the risk on trade returns and growth stocks are embraced again, PEJ should jump ahead of its larger rival and generate more alpha.