Lacking Enthusiasm For Discretionary ETFs

The Consumer Discretionary SPDR (ETF) XLY and rival discretionary exchange-traded funds often spend some time in the limelight at this time of year simply because it is the holiday shopping season.

That is a known seasonal factor but by no means a guarantee of upside to come for XLY and friends. Year-to-date, XLY is up 9.1 percent, a performance that is solid but middling among the sector SPDR ETFs. Not to mention, XLY trails the 12.8 percent returned by the S&P 500 this year by a significant margin.

Hampered Holdings

Amazon.com, Inc. AMZN, XLY's largest holding at 12.5 percent of the ETF's weight, has been a primary driver of XLY's performance this year with a 13 percent return. Comcast Corporation CMCSA is XLY's second-largest holding at 6.9 percent.

Even with Amazon, six of XLY's top 10 holdings are in the red year-to-date. Add to that, four of XLY's top 10 holdings are four of the nine Dow stocks down this year, and two of those four are two of the three Dow stocks down at least 10 percent this year.

Analyst Reactions

That might be why some analysts are less than enthusiastic. For example, AltaVista Research rates XLY Underweight.

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

Based on 2016 estimates, XLY sports a price-to-earnings ratio of 19.5 while the research estimates a P/E of 18.6 for the S&P 500. Still, that is not keeping investors away from XLY as the ETF's shares outstanding tally is up 12 percent over the past month, according to AltaVista data. On the other hand, XLY's shares outstanding count is down 9 percent over the past year.

“Consumer firms have become more profitable since the financial crisis — see Net Margins and ROE — although we question the continued improvement in margins implied by the consensus estimates for 2017. But valuation multiples appear to be trending lower after trading in a narrow range for the last two years, and as the 2nd best performing sector over the past 10 years (after Staples) Discretionary firms remain richly valued vs. the S&P 500,” said AltaVista.

AltaVista has Underweight ratings on four sector SPDR ETFs including XLY.