Market Overview

S&P Likes 2 Discretionary ETFs (XLY, RTH)


It might be hard to remember after the savage sell-off experienced by equities and other riskier assets, but consumer has been, for the most part, positive in 2012 as the U.S. consumer has show considerable resilience in the face of macroeconomic headwinds.

From Brussels to Beijing, ex-U.S. economic data points have been less than pleasant this year, but the U.S. consumer, 70% of this country's GDP, has carried on, helping boost shares of discretionary stocks and ETFs in the process. In fact, S&P Capital IQ says the S&P Consumer Discretionary Sector is "in a continuing display of superior relative strength that has now entered its fifth consecutive year thus far in 2012..."

"Overall, we expect gradual but steady improvement in consumer confidence, spending, jobs growth and other macroeconomic variables to help support our continued favorable outlook for the Consumer Discretionary sector," S&P Capital IQ said in a research note. Along those lines, the research firm has placed Overweight ratings on the Consumer Discretionary Select Sector SPDR (NYSE: XLY) and the Market Vectors Retail ETF (NYSE: RTH).

In the past three months, RTH is up over 10% while XLY is up about 12%. XLY, which has an expense ratio of 0.18%, is the largest discretionary ETF with almost $3.2 billion in assets under management. RTH, which was one of the old HOLDRs funds acquired by Van Eck Global last year, has an expense ratio of 0.35% and AUM of $82.7 million.

"Closer scrutiny of the underlying inputs shows that both top-ranked funds, XLY and RTH, appear to be primarily recommended by demonstrably superior cost considerations on such parameters as expense ratio and bid/ask spread. While performance analytics appeared to have a neutral impact on the overall ranking, we note that XLY had positive inputs for S&P STARS and S&P Technical parameters. And, based on risk considerations, both funds also had favorable inputs for S&P Quality Rank, which, in the case of RTH, was apparently the most significant singular variable for a positive assessment in that particular category," S&P said in the note.

XLY's top-10 holdings account for approximately 44% of the ETF's weight. Some of those stocks include three Dow components, McDonald's (NYSE: MCD), Walt Disney (NYSE: DIS) and Home Depot (NYSE: HD), along with Amazon (Nasdaq: AMZN) and Nike (NYSE: NKE).

RTH is home to just 26 stocks and the fund's top-10 holdings represent about 62% of its total weight. That lineup includes two Dow stocks, Wal-Mart (NYSE: WMT) and Home Depot, along with Amazon, CVS Caremark (NYSE: CVS) and Target (NYSE: TGT) among others.

XLY has an almost 29% allocation to media stocks, meaning it could be a good way to play increased election advertising spending. The fund also features an 18% weight to hotel and restaurant firms. On the other hand, RTH is more concentrated to traditional brick and mortar retailers, though in addition to Amazon, the fund does offer a modest weight to Netflix (Nasdaq: NFLX).

Posted-In: Analyst Color Long Ideas News Sector ETFs Short Ideas Pre-Market Outlook After-Hours Center Markets


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