Amazon Barely Enough To Prop Up Discretionary ETFs

One of this year's biggest single stock stories is the rise of Amazon.com, Inc. AMZN shares of the e-commerce giant are up 10.3 percent year-to-date and hit another new high last Friday. However, some consumer discretionary exchange-traded funds with large weights to Amazon are scuffling.

Consumer Discretionary ETFs

For example, the Consumer Discretionary SPDR (ETF) XLY, the largest consumer discretionary ETF by assets, is up 3.9 percent this year. That is only a middling showing among the sector SPDRs and one that has XLY trailing the S&P 500 by 150 basis points. Remember that XLY has a 12.6 percent weight to Amazon, making the stock the ETF's largest holding by 540 basis points over second-place Home Depot Inc HD.

XLY's lethargy relative to Amazon has some analysts concerned about the ETF's near-term prospects. In a recent note, AltaVista Research slapped XLY with an underweight rating, implying below average appreciation potential for the staples ETF.

Related Link: Black Friday In July: Retailers Such As Target, Gap Hoping To Piggyback Amazon's Prime Day

“Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” said AltaVista.

Names Flip-Flop

Some last year's helpers are dragging on XLY this year. For example, Nike Inc NKE and Walt Disney Co DIS, two of the four Dow components found in XLY's top 10 holdings, are also two of the 10 Dow stocks that are lower year-to-date.

Although Amazon is almost universally viewed as a richly valued stock, AltaVista's estimated 2016 price-to-earnings ratio on XLY is 18.2, just slightly ahead of the research firm's estimated 2016 P/E ratio for the S&P 500. Three other sector SPDR ETFs trade at high earning multiples, according to AltaVista data.

Investors, Proceed With Caution

Investors are approaching XLY with caution, if at all. Over the past month, the ETF's shares outstanding tally is lower by five percent, indicating departures from the fund. XLY's short interest of 15 percent of shares outstanding is toward the bottom end of the 11 sector SPDR ETFs.

“These firms have become leaner in the years since the financial crisis although we question the uptick in margins implied by consensus estimates for 2016–17, especially as savings at the gas pump largely aren't being spent elsewhere. Valuation multiples appear to be trending lower after trading in a narrow range for the last two years — see P/E ratio — but the sector remains richly valued vs. the S&P 500 in our opinion,” said AltaVista.