Strong Case For Consumer Discretionary ETFs

April 18, 2019

Economic growth in the U.S. may be slowing, but it will still outpace the growth rate seen in other developed foreign markets.

To investors, that means looking toward U.S. sectors filled with companies that generate the majority of their revenue domestically rather than from foreign economies. One such sector is consumer discretionary.

The U.S. economy does not rely on exports nearly as much as other developed economies. For example, the U.S. only derives about 12% of GDP from exports, while countries like Germany (46%), and China (20%) rely far more on the health of foreign economies.

 

 

Furthermore, continued strength in the U.S. labor market will support growth in spending, which should also benefit the consumer discretionary sector. The prime age employment/population ratio (our favored employment measure) has increased to 79.90%, which is close to the 2007 prefinancial crisis high (Exhibit 2).

The U.S. labor force gains roughly 100,000 new entrants each month due to population growth. With nearly 7 million open jobs in the U.S., our economy has plenty of capacity both in available jobs and in available workers.

 

 

ETF Choices

There are several options for investors looking to add a dedicated consumer discretionary ETF to their portfolios. A few of those options include the iShares Evolved U.S. Discretionary Spending ETF (IEDI), the Consumer Discretionary Select SPDR Fund (XLY) and the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD).

These funds offer different access to the sector.

XLY is the classic in the space, tracking a market-cap-weighted index of consumer discretionary stocks drawn from the S&P 500. It has an expense ratio of 0.13%. RCD tracks an equal-weighted index of S&P 500 consumer discretionary stocks for 0.40% in fees, and IEDI is an actively managed portfolio focused on the discretionary spending sector that relies on an algorithm for stock classification, according to ETF.com. It’s a methodology that groups companies based on business similarities. It costs 0.18%.

At the time of writing, Stringer Asset Management held XLY among its universe of ETFs included in its suite of ETF Portfolios. Stringer Asset Management is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact Stringer Asset Management at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.

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