Consumer Discretionary ETF Gaining Momentum

The Consumer Discretionary SPDR XLY is experiencing a strong rally after several of its holdings reported better than expected earnings this week.

Increased spending on discretionary items is a positive sign for the economy, signaling consumers are confident enough with their current fiscal situation to start spending their money on wants rather than needs.

As this longer-term shift continues to benefit the discretionary sector, the calendar could also give the related stocks a boost. With Christmas only nine weeks away, U.S. retailers are gearing up for what should be a strong holiday season.

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The top holdings in the ETF are from a variety of industries and include The Walt Disney Company, Comcast Corporation, The Home Depot, Inc., and Amazon.com, Inc.

Harley Davidson Up...

One company that could be considered the poster child for discretionary spending, Harley-Davidson Inc HOG, is helping boost XLY this week after posting very impressive quarterly numbers.

New motorcycle sales in the U.S rose 3.4 percent year over year. Harley-Davidson posted earnings per share of $0.69, beating estimates by $0.09, as well as beating revenue estimates by $160 million. The stock is up 12 percent over the last week.

While the performance of the ETF has been impressive, it has had to fight some uphill battles with several holdings reporting lackluster numbers. McDonald’s Corporation MCD and Urban Outfitters, Inc. URBN are two stocks that hit new 52-week lows this month as investors are starting to question the business models.

...McDonald's And Urban Outfitters Down

McDonald's reported that global comparable store sales decreased by 3.3 percent, and revenue decreased by 4.6 percent year over year. The global fast food restaurants glaring problem in the U.S seems to be its inability to connect with the millennial generation.

The generation that is now the largest in the country and has an increasing spending power is no longer interested in cheap, low-quality menu items. The trend is toward healthier, made-to-order options at restaurants such as Chipotle Mexican Grill, Inc. or Panera Bread Co.

Urban Outfitters issued a sales warning last week, which sent shares tumbling 12 percent, the lowest level seen since 2012. The company has struggled since early last year with a distinctive downward trend in the stock. Urban Outfitters will have to find a way to capitalize on the increased consumer spending in the next few months to have a chance of rebounding.

The beauty of XLY (and any ETF) is that the diversification allows an investor to gain exposure to the entire sector without having to choose an individual stock. As long as the trends continue and the holiday shopping season comes in as expected, the sector and ETF should continue to perform well.