This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asser Management.
Business and consumer confidence levels in the U.S. and abroad continue to reflect improving global economic fundamentals.
The U.S. consumer discretionary sector is poised to take advantage of potential market gains as we expect these improving fundamentals to translate to higher stock prices going forward. Additionally, these securities are trading at attractive relative valuations compared to the S&P 500 Index, potentially making an attractive risk/reward opportunity.
We think the U.S. consumer discretionary sector should benefit as the economy continues to improve. Advancements in the U.S. economy are reflected in recent improvements in business sentiment, as well as strong jobs creation.
Additionally, aggregate income is at an all-time high and consumer confidence is strong. For example, according to the NFIB Small Business Optimism Index, optimism from small companies in the U.S. has surged to levels not seen since December 2004.
Meanwhile, the University of Michigan's Index of Consumer Sentiment suggests that U.S. consumers are also optimistic about the future.
Combined, these factors should lead to increased consumer spending in the months ahead. Additionally, the U.S. consumer discretionary sector is trading at a discount to its historical average. We think these attractive valuations create a nice buffer to downside risk, while improving economic data support higher prices.
There are many options available for investors looking to add dedicated exposure to the consumer discretionary space.
Some ideas include the Vanguard Consumer Discretionary Index Fund (VCR), the Consumer Discretionary Select Sector SPDR Fund (XLY) and the iShares Global Consumer Discretionary ETF (RXI).
Still, investors should be careful about how they attempt to take advantage of increased consumer spending. For example, old-line retailers continue to struggle as consumers' preferences are changing.
Consider selecting an investment that stands to benefit from today's consumer spending preferences by emphasizing online shopping, businesses that service the housing sector, in addition to corporate stalwarts.
At the time of writing, Stringer Asset Management held XLY among its universe of ETFs included in its suite of ETF Portfolios. SAM is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact SAM at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.