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Geared Consumer Discretionary ETFs For An Altered Retail Landscape

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Geared Consumer Discretionary ETFs For An Altered Retail Landscape

The coronavirus outbreak is dramatically altering some industries and retail isn't immune those alterations. Already undergoing seismic shifts due to the encroachment of e-commerce, traditional retailers are now being pinched by mall and store closures and significantly reduced consumer spending, among other factors.

What Happened

Active, aggressive traders can play these trends with leveraged exchange traded funds, including the Direxion Daily Consumer Discretionary Bull 3X Shares (NYSE: WANT) and the Direxion Daily Consumer Discretionary Bear 3X Shares (NYSE: PASS).

On the surface, it may appear that PASS is the way for traders to go over the near-term.

“US retail discretionary spending is being adversely affected by the coronavirus pandemic, given significant business interruption caused by proactive or mandated closures of retail locations in non-essential categories and the increased likelihood of a downturn in discretionary spending that extends well into 2021,” said Fitch Ratings in a recent note.

Why It's Important

Digging deeper, the bullish WANT is clearly appealing, too. WANT looks to deliver triple the daily returns of the Consumer Discretionary Select Sector Index. That index allocates nearly 24% of its weight to Amazon.com (NASDAQ: AMZN), one of the retail names that's not just surviving in the coronavirus environment. It's thriving.

Amazon thriving coupled with COVID-19 is exuding pressure on other retailers, which gets a trader back to consider the bearish PASS. PASS attempts to deliver triple the daily inverse returns of the Consumer Discretionary Select Sector Index.

“We project retail discretionary spending will decline 40%-50% in first-half 2020, with a slow rate of improvement expected through the summer from a current 80%-90% decline in sales if stores start to open mid-May or early June,” said Fitch. “Given an increased likelihood of a consumer downturn, we are forecasting sales to be down mid-to-high single digits in second-half 2020 and sales in 2021 to decline 8%-10% from 2019 levels.”

What's Next

Some lower quality retailers, including some bit players in the Consumer Discretionary Select Sector Index, are under ratings pressure, but there remains a case for the bullish WANT because Fitch sees many retailers surviving the COVID-19 crisis.

“We anticipate many retailers in our coverage universe can weather the current challenges, given good market positions and sufficient liquidity stemming from operating and cash flow preservation initiatives, potentially emerging in stronger positions over time as weaker competitors go out of business,” said the ratings agency.

 

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