XLY Consumer Discretionary Select SPDR Fund

The market is shaping up pretty nicely for consumer stocks as we approach the second half of the year. We have seen strong data in a number of key areas that are important to the consumer, suggesting that a continuation of the bull run could take place in this important market segment.

After all, the jobs market is slowing coming back, while housing is also on the upswing, making consumers feel better about their financial situations. Furthermore, oil prices are staying at a moderate level—thanks in part to a strong dollar—so consumers have plenty of extra cash to spend on discretionary products and services.

In fact, recent consumer sentiment surveys have been extremely positive with the latest reading surging past expectations. The initial reading in the University of Michigan survey came in at 83.7, a huge surge from the prior level of 76.4 and well above the consensus estimate of 78.0 (read Make the Ultimate Consumer Bet with the Gaming ETF).

Given this surprisingly positive data and the slowly improving economy, there could still be plenty of time to look at consumer stocks to take advantage of the strong trends in the space. While looking at individual companies is certainly an option, a focus on top ranked consumer ETFs could be a lower risk way to tap into the same broad trends.

Top Ranked Consumer ETFs in Focus

This approach not only takes into account the Zacks Rank on the individual securities, but also ETF specific factors such as bid ask spreads and expense ratios, in order to get a full picture of the fund and its investment potential. Using this technique, we have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’  in the consumer sector (see all the Top Ranked ETFs).

While any of these top ranked ETFs look likely to outperform, the following three funds could be the best choices to tap into the space. That is because this trio has strong momentum over the past one year time frame, and potentially superior weighting methodologies which could allow this group to continue leading the consumer space higher in the months ahead.

Guggenheim S&P Equal Weight Consumer Discretionary ETF (RCD)

This underappreciated ETF offers up exposure across the consumer discretionary market, holding over 80 companies in its portfolio. Expenses are a bit steep at 50 basis points a year, while volume is a little light, though the liquid nature of the underlying holdings should keep bid ask spreads tight.

The equal weighting also helps to ensure that small and mid cap securities are better represented, as large caps only take up about 60% of assets, compared to nearly 90% for XLY. In terms of industries, specialty retail takes the top spot at roughly one-fourth of the total, followed by modest allocations to department stores, and then apparel and luxury goods (read Equal Weight and #1 Rank: A Winning ETF Combo?).

The ETF currently has a Zacks ETF Rank of 1 or ‘Strong Buy’, suggesting that it is positioned to outperform similar competitors. This has certainly been the case as of late, as the ETF has gained over 38% in the trailing one year time frame, easily outpacing other broad sector funds, and the S&P 500 as well.

First Trust Consumer Discretionary AlphaDEX Fund (FXD)

For a slightly more ‘active’ choice in the consumer discretionary world, investors should consider FXD for quality exposure. The fund is a bit pricey though, as it charges 70 basis points a year in fees, though it has solid volume of about 160,000 shares a day.

The reason for this extra cost is the AlphaDEX methodology, which seeks to narrow down the consumer market to only the best positioned companies. It ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of stocks.

Still, roughly 125 stocks are in this fund’s basket, with media and specialty retail taking the top two spots. From a market cap look, large caps only take up about one-third of the total, so this could be a somewhat volatile fund as well (see 3 ETFs with Incredible Diversification).

The product does have a top Zacks ETF Rank of 1 or ‘Strong Buy’ though, and it also appears poised to lead the market higher. This has been the trend in this product for much of the recent trading sessions too, as the fund has soared by close to 37% in the past one year time frame.

SPDR S&P Retail ETF (XRT)

For a more concentrated play on the consumer sector, investors could look to XRT and its retail focused portfolio. The fund holds about 100 companies in its basket, sees incredible volume, and is also a low cost choice at just 35 basis points a year.

Its equal weight focus also ensures that no single company dominates the risk return profile of the ETF, and that mid and small caps are once again well represented. In fact, no single company makes up more than 1.7% of assets, while large caps account for just under a quarter of the total from a cap perspective.

This product also has a top Zacks ETF rank, suggesting that it too is poised to outperform. The fund has certainly done this so far in 2013, as it has moved higher by over 24% YTD and 36% in the trailing one year time frame.

Bottom Line

There are some very good reasons to be a buyer of consumer stocks at this point in time. The economy is seemingly back on track while important data points—such as consumer sentiment, home prices, and the jobs market—are all improving (also read Why I Hate Volatility ETFs and Why You Should Too).

This suggests that even with the big run that some consumer ETFs have had so far this year, the space could be poised to move higher in the back half of 2013. So, consider taking a closer look at a few of the top Ranked ETFs in this sector for excellent exposure that could potentially provide investors with some more outperformance in the coming months as well.

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FT-CONSUMR DIS (FXD): ETF Research Reports
 
GUGG-SP5 EW C D (RCD): ETF Research Reports
 
SPDR-CONS DISCR (XLY): ETF Research Reports
 
SPDR-SP RET ETF (XRT): ETF Research Reports
 
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