With Friday being the last trading day of October, now is the time to start preparing for November and that preparation includes identifying sector exchange traded funds that have a propensity for performing well in the fourth quarter.
Another strategy is to stick with a sector ETF that has been durable for most of this year. The Consumer Discretionary Select Sector SPDR XLY, the largest consumer discretionary ETF, fits the bill. Entering Friday, XLY sports a 12 percent year-to-date gain, the best among the nine sector SPDR ETFs.
That is to say XLY has earned its place as S&P Capital IQ's focus ETF of the month for November.
"Sam Stovall, US equity strategist for S&P Capital IQ, thinks the consumer discretionary sector can benefit from a low unemployment rate and should face a minor impact from small and well-telegraphed Fed funds rate increases. Further he points to Standard & Poor's Economics forecast that consumer spending is projected to increase 3.3% in 2016, up from 3.1% expected in 2015. In mid-October, U.S. consumer sentiment index, as assessed by the University of Michigan rose to 92.1, higher than the prior month's reading of 87.2," said S&P Capital IQ in a new research note.
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Identifying the sources of XLY's strength is not difficult. Just start with the ETF's holdings that are also Dow components. Just 11 Dow stocks have posted double-digit year-to-date gains, but four –- Walt Disney Co. DIS, Home Depot Inc. HD, McDonald's Corporation MCD and Nike Inc NKE -– reside in XLY. Those stocks, each of which is a top 10 holding in XLY, combine for over 22 percent of the discretionary ETF's weight.
Oh yeah, Amazon.com, Inc. AMZN is XLY's largest holding at a weight of nearly 10 percent and all that stock has done this year is more than double in value.
"From a risk perspective, 47 companies inside XLY have B+ or higher S&P Capital IQ Quality Rankings for their consistent earnings and dividend records. Examples include McDonalds and Nike (, which are A and A+ ranked, respectively," adds S&P Capital IQ.
Investors have displayed faith in XLY, adding over $1.4 billion in new assets to the ETF this year. That is not surprising. What may be seen as surprising is that XLY's year-to-date inflows trail those of the Energy Select Sector SPDR XLE, the worst-performing sector SPDR this year, by over $500 million.
"Besides reviewing holdings, we analyze XLY from an ETF perspective. Technically, XLY has a bullish pattern, trading above its 200-day moving average. Meanwhile, XLY trades more than seven million shares on a daily basis, with a tight $0.01 bid/ask spread. The expense ratio recently was decreased to 0.14%, making it among the lower cost products around," said S&P Capital IQ.
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