A Leading Sector ETF For November

With Friday being the last trading day of October, now is the time to start preparing for November and that preparation includes identifying sector exchange traded funds that have a propensity for performing well in the fourth quarter.

Another strategy is to stick with a sector ETF that has been durable for most of this year. The Consumer Discretionary Select Sector SPDR XLY, the largest consumer discretionary ETF, fits the bill. Entering Friday, XLY sports a 12 percent year-to-date gain, the best among the nine sector SPDR ETFs.

That is to say XLY has earned its place as S&P Capital IQ's focus ETF of the month for November.

"Sam Stovall, US equity strategist for S&P Capital IQ, thinks the consumer discretionary 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% in 2016, up from 3.1% expected in 2015. In mid-October, U.S. consumer sentiment index, as assessed by the University of Michigan rose to 92.1, higher than the prior month's reading of 87.2," said S&P Capital IQ in a new research note.

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Identifying the sources of XLY's strength is not difficult. Just start with the ETF's holdings that are also Dow components. Just 11 Dow stocks have posted double-digit year-to-date gains, but four –- Walt Disney Co. DIS, Home Depot Inc. HD, McDonald's Corporation MCD and Nike Inc NKE -– reside in XLY. Those stocks, each of which is a top 10 holding in XLY, combine for over 22 percent of the discretionary ETF's weight.

Oh yeah, Amazon.com, Inc. AMZN is XLY's largest holding at a weight of nearly 10 percent and all that stock has done this year is more than double in value.

"From a risk perspective, 47 companies inside XLY have B+ or higher S&P Capital IQ Quality Rankings for their consistent earnings and dividend records. Examples include McDonalds and Nike (, which are A and A+ ranked, respectively," adds S&P Capital IQ.

Investors have displayed faith in XLY, adding over $1.4 billion in new assets to the ETF this year. That is not surprising. What may be seen as surprising is that XLY's year-to-date inflows trail those of the Energy Select Sector SPDR XLE, the worst-performing sector SPDR this year, by over $500 million.

"Besides reviewing holdings, we analyze XLY from an ETF perspective. Technically, XLY has a bullish pattern, trading above its 200-day moving average. Meanwhile, XLY trades more than seven million shares on a daily basis, with a tight $0.01 bid/ask spread. The expense ratio recently was decreased to 0.14%, making it among the lower cost products around," said S&P Capital IQ.