Here’s how to invest in the American consumer.
Despite all the concern about a potential trade war affecting the U.S. economy, things look very favorable so far on the consumer spending front. In July, estimates for second-quarter GDP growth topped 4 percent for the hottest pace since 2014. Soon after, the Conference Board reported that consumer sentiment about “present conditions” were the best since 2001. Then, at the beginning of August, the Bureau of Labor Statistics reported that the unemployment rate had edged down to 3.9 percent. If you want to invest in this strong trend in U.S. consumer spending in 2018, consider these nine targeted exchange-traded funds.
Consumer Discretionary Select Sector Fund (ticker: XLY)
Topping $14 billion in assets under management, this consumer discretionary ETF is the go-to option for most investors. And why not, since it has 80 holdings that represent the very biggest brands that are out there; top picks right now include Amazon.com (AMZN), Walt Disney Co. (DIS) and Starbucks Corp. (SBUX). This fund weights components by market capitalization, so its holdings are a bit top heavy with Amazon representing a massive 25 percent. A few other funds on this list also run afoul of that, since the $910 billion company dwarfs all other consumer names. But given the recent outperformance of AMZN, maybe that’s a plus.
PowerShares Dynamic Leisure and Entertainment ETF (PEJ)
This PowerShares fund is full of obvious plays on consumer spending, including Delta Air Lines (DAL) and Hilton Hotels Corp. (HLT). However, leisure spending doesn’t have to mean a two-week vacation. The typical American spends more at restaurants than the grocery store. A solid way to tap into that trend is with stocks like Taco Bell and Pizza Hut parent Yum Brands (YUM) or delivery service GrubHub (GRUB). The fund includes about 30 companies and evaluates stocks on earnings momentum, share price performance and other factors. This aims to ensure investors get the best of the best.
iShares U.S. Consumer Services ETF (IYC)
Widening the scope, iShares offers a fund that includes stocks that offer services to consumers instead of (or in some cases, in addition to) tangible goods. This allows for the inclusion Netflix (NFLX) and Home Depot (HD). Unlike the Powershares fund, this is a much more diversified ETF with about 160 total components. For investors looking at a holistic approach to spending on services, this fund should allow access to all the relevant investments. However, be warned that Amazon once again sucks up a big part of the portfolio, at north of 20 percent of assets.
S&P Retail ETF (XRT)
The flip side of focusing on services is to target physical goods sold to the consumer. That’s what XRT offers, with 85 merchants that span retail, including grocery stores Supervalu (SVU), Walmart (WMT) and even parts supplier Advance Auto Parts (AAP). This fund is structured under an equal-weight philosophy where it regularly rebalances to allocate roughly the same portion of funds across its 89 holdings. This prevents Amazon from dominating the fund. The XRT provides a great way to play spending trends among retailers without putting all your eggs in one basket.
Amplify Online Retail (IBUY)
Many investors have noted high-tech trends, like e-commerce and ordering on the go through mobile apps, have put a damper on companies that rely on people window shopping at the mall. This unique ETF focuses on this digital trend with 40 of the biggest names in the business. Yes, that includes big names you recognize — Amazon and eBay (EBAY). The fund regularly rebalances to keep these names from getting too large, and allows smaller stocks plenty of runway. Top holdings are car-sales platform Carvana Co. (CVNA) and fast-growing craft site Etsy (ETSY), which have outperformed significantly in 2018.
iShares US Consumer Goods ETF (IYK)
Another investment strategy in the e-commerce age is to zero in on manufacturers, without worrying about whether customers buy the products in person at a store or with their smartphone. Of the roughly 100 stocks listed in this fund, Americans will easily recognize the parent companies behind many products they regularly purchase. These include Coca-Cola Co. (KO), Nike (NKE) and Mondelez International (MDLZ), which owns snack nameplates Ritz crackers and Oreo cookies. In a strong consumer spending environment, these are the products it’s easy to splurge on, and investors in this ETF will be well-positioned to benefit.
Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
Many of the brands discussed so far are well entrenched, and a strong consumer spending environment may not change their overall business trends. That’s not the case at smaller and fast-growing consumer stocks, where the tailwind of better spending can make a substantive impact. This small-cap fund allows you to zero in on those names, including regional casino operator Penn National Gaming (PENN) and construction contractors TopBuild Corp. (BLD). If you’re invested in a large-cap fund that’s benchmarked to an index such as the Dow Jones industrial average or Nasdaq, you likely already have the big names. This fund is a way to get small.
John Hancock Multi-Factor Consumer Discretionary ETF (JHMC)
Another way to get beyond typical consumer names is this ETF’s multifactor approach. This strategy emphasizes performance metrics such as higher profitability and potential value relative to peers, and then structures a targeted list of about 150 holdings. That old favorite Amazon makes the top of the list given its non-stop growth. But AMZN is only about 7 percent of the portfolio, leaving room for others like home improvement retailer Lowe’s Cos. (LOW), among others. This focus on a qualitative screening could lead to outperformance, but keep in mind you’re at the mercy of the system — and if the metrics miss, you could wind up worse off.
PowerShares S&P 500 Equal Weight Consumer Discretionary Portfolio (RCD)
Having a difficult time deciding where to put your money within the consumer space? There’s no need to overthink it. This ETF takes the 80 biggest U.S. consumer names, all members of the S&P 500 index, and then regularly rebalances to target a weighting just shy of 1.3 percent in each stock. That ensures Amazon, sure, but also plenty of less-followed names including Olive Garden operator Darden Restaurants (DRI), discounter Dollar Tree (DLTR) and fashion brand Michael Kors Holdings (KORS) to name a few. If you want a broad play on strong U.S. consumer spending trends, this is a great way without a lot of complexity.
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9 ETFs to Cash In on Consumer Spending originally appeared on usnews.com
