This Industry ETF Could Work This Year

Last year's top-performing sector, consumer discretionary, is off to a rocky start in 2016 as highlighted by the 6.7 percent slide for the Consumer Discretionary Select Sector SPDR XLY. Homebuilders stocks and exchange traded funds have come under even more duress as the 13.4 percent year-to-date loss for the SPDR S&P Homebuilders ETF XHB confirms.

XHB's discretionary exposure is substantial, as the ETF allocates over 28 percent of its combined weight to home furnishings retailers, home improvement chains and home furnishings manufacturers.

So it should be good news for the ETF that existing-home sales were up 7.7 percent from December 2014. The median existing-home price increased 7.6 percent to $224,100. First-time buyers made up 30 percent of existing home sales in 2015, up from 29 percent in the past two years.

“We believe homebuilders and the more discretionary housing-related industries are attractive given improving employment and increased household spending. This theme should be supported in 2016 as home sales reach levels not seen since 2007 and homebuilder sentiment hits decade-long highs,” said State Street Vice President David Mazza in a recent note. 

XHB differs from rival homebuilders ETFs due to its robust exposure to the discretionary/retail side of the residential real estate industry. That includes an almost 8 percent weight to home improvement retailers, a group that is expected to deliver some of the most impressive earnings growth in the broader consumer discretionary sector.

Dow component Home Depot Inc. HD and rival Lowe's Cos. Inc. LOW combine for 10 percent of XHB's weight. The ETF's other top 10 holdings include Whirlpool Corp. WHR and Williams-Sonoma Inc. WSM.

“Investors can also consider the consumer discretionary sector as a means of adding growth to a portfolio. Consumer discretionary firms stand to benefit from higher spending and confidence as lower energy costs and a decline in import prices translate into fatter wallets for consumers,” adds Mazza.