An easy way to invest in the American consumer.
By some measures, consumer spending accounts for roughly two-thirds of U.S. economic activity, and Americans have been confident about their finances and freely spending in 2018. In June, economic expectations among U.S. consumers hit the highest level since 2002. And why not, given that unemployment is at record lows. Sure, there are always reasons to fret about volatility in the stock market or the state of American politics, but by and large, spending by consumers in the U.S. is quite strong right now. Here are nine tactical exchange-traded funds to let you invest in this trend.
Vanguard Consumer Discretionary ETF (ticker: VCR)
This $3 billion fund features some of the biggest brands, including e-commerce giant Amazon.com (AMZN), home improvement retailer Home Depot (HD) and sports apparel icon Nike (NKE) among its top holdings. As you can tell by this trio, just about every corner of the consumer landscape is represented through large companies that are big names in their part of the marketplace. However, it’s worth noting that despite 328 holdings, this market cap-weighted index is a bit top-heavy with the largest 10 holdings representing about half of the portfolio. That means a big move in one of the biggest stocks could skew this fund.
Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
Investors who don’t like a bias toward megabrands can consider smaller consumer stocks with this ETF. The downside of smaller companies is they can be more risky and aren’t as well capitalized. However, it’s also worth noting that in the age of trade policy concerns, smaller consumer companies tend to book 100 percent of sales at home in the U.S. and avoid international exposure. You may not recognize this fund’s top holdings like work boot manufacturer Wolverine World Wide (WWW) or regional car repair chain Monro (MNRO), but PSCD is a good choice to avoid the big guys.
PowerShares S&P 500 Equal Weight Consumer Discretionary Portfolio (RCD)
Another strategy for investors to consider is this “equal weight” approach. This PowerShares ETF takes the 80 biggest U.S. consumer companies, which includes big names like McDonald’s Corp. (MCD) and Foot Locker (FL), and then regularly rebalances them to roughly the same weighting. That ensures size doesn’t bias the fund toward a few companies such as the nearly $1 trillion Amazon, and that investors are more diversified across the sector. The RCD is a way to invest in the general trend of increased spending without relying on a small group of stocks.
S&P Retail ETF (XRT)
To get to the core of consumer spending, then a direct play on the subsector of retail could be the best way to go. The XRT’s top holdings include a wide swath of merchants, from Victoria’s Secret parent L Brands (LB) to auto parts store Auto Zone (AZO) to big box stores like Walmart (WMT). With 96 holdings and more than $600 million in total assets, this one-stop retail fund helps investors target the general trend of American consumers shopping more. Just remember that if things sour in the economy, some of these merchants may be the first place where consumers pull back.
Amplify Online Retail (IBUY)
In the age of Amazon, many brick-and-mortar stores aren’t doing so well. This tactical fund from Amplify allows investors to reach companies that generate the majority of their revenue from e-commerce and mobile apps instead of foot traffic at a strip mall. With 40 of the biggest names in the business under its umbrella, including eBay (EBAY) as well as smaller picks like fast-growing craft site Etsy (ETSY), investors interested in retail can get a diversified fund with its sites on the online retail market.
iShares U.S. Consumer Services ETF (IYC)
One segment of the consumer discretionary sector that has been lifted by recent high-tech trends is the service business. Whether it’s digital travel portal Booking Holdings (BKNG) or media giant Walt Disney Co. (DIS) with its streaming video service in 2019, service stocks are thriving as they use technology to cut costs and win business directly from consumers. The IYC is a fund with an attractive mix of stocks that are insulated from the Amazon effect but also benefit from technological innovation.
PowerShares Dynamic Leisure and Entertainment ETF (PEJ)
Another group within the consumer discretionary area not threatened by online ordering is leisure and entertainment. After all, travelers need carriers like Delta Air Lines (DAL) and hotels like Hilton Worldwide Holdings (HLT). There’s also some technological benefits for this sub-sector, as evidenced by food delivery service GrubHub (GRUB), which has capitalized on the mobile app revolution. And the stocks in PEJ thrive in the experiential and localized nature of leisure spending.
iShares US Consumer Goods ETF (IYK)
Another way to avoid exposure to merchants having trouble in the digital age is to focus on the goods themselves, with investments in the companies making things instead of the stores selling those items for seemingly smaller margins. Think names like Coca-Cola Co. (KO), which could care less if you buy a soft drink at a restaurant or gas station or grocery store, or cosmetic giant Estee Lauder Cos. (EL), which graces shelves in countless drug stores and department stores. The IYK is well-positioned to profit from the power of brands and products sought by consumers.
John Hancock Multi-Factor Consumer Discretionary ETF (JHMC)
Can’t decide which flavor of consumer stocks to target? This fund employs a unique multifactor approach that emphasizes performance metrics over slicing up the sector into different classes of companies. With 145 holdings, JHMC focuses on factors that include “smaller cap, lower relative price and higher profitability” to seek outperformance compared to typical choices in the space. The fund’s focus is appealing only if this screening adds an extra level of profits, however, since the annual expense ratio of 0.5 percent is at the higher end among ETFs on this list.
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