Media ETFs Look To Join Discretionary Party

The consumer discretionary sector is the best performer in the S&P 500 this year and as measured by the Consumer Discretionary Select Sector SPDR XLY, the battle is not even close. XLY, the largest consumer discretionary exchange traded fund by assets, is up 13.9 percent year-to-date, an advantage of 600 basis points over the second-best SPDR, the Technology Select Sector SPDR XLK.

With the strength of the broader discretionary group in mind, perhaps it is surprising media stocks have been laggards. Although Walt Disney Co. DIS is one of the best-performing member of the Dow Jones Industrial Average this year, the PowerShares Dynamic Media Portfolio PBS, an ETF that allocates 5.1 percent of its weight to Disney, has posted a year-to-date gain of just 4.6 percent.

Pre-market earnings reports today from 21st Century Fox Inc. FOXA and Time Warner Cable Inc. TWC could provide PBS with the spark the ETF needs. Those stocks combine for 9.6 percent of the ETF's weight.

“Shares of Disney, 21st Century Fox , Time Warner and other movies & entertainment companies fell notably in August, before partially recovering in subsequent months. S&P Capital IQ thinks investors remain concerned that Disney and other media companies face secular challenges from the growing popularity of cloud-based over-the-top (OTT) video service -- an Internet distribution model that bypasses traditional pay TV providers. As we head into earnings season, S&P Capital IQ Equity Analyst Tuna Amobi thinks the concerns are overdone and has buy recommendation on Disney and Time Warner. Meanwhile, he has a hold on FOXA,” said S&P Capital IQ in a new note. 

PBS is a smart beta spin on media stocks. The $134.5 million Dynamic Media Intellidex Index evaluates potential constituents based on price momentum, earnings momentum, quality, management action, and value. Value might be hard to come by in the discretionary sector at the moment because the sector is among the most richly valued, but the upside of that is momentum is not hard to find. 

That momentum will be tested this week amid spate of earnings reports, including 21^st Century Fox and Time Warner Cable today.

“Disney is expected to report its latest quarterly results after the close on Thursday November 5. Capital IQ consensus forecasts are for EPS of $1.14, up notably from $0.89 a year earlier. Amobi thinks Disney will benefit from continued strength at its domestic theme parks, as well as for its filmed entertainment and consumer products businesses. However, he has a relatively tempered outlook for cable affiliate fee growth, partly due to recent ESPN subscriber losses,” adds S&P Capital IQ.

Disney, 21^st Century Fox and Time Warner Cable combine for about 15 percent of PBS's weight.