Consumer Discretionary

Consumer discretionary ETFs look pricey. The discretionary sector had a strong run in 2009 and the first half of 2010. Now, consumer staples are cheaper. Broad market benchmarks like the S&P 500 are cheaper.

Consumers are also economizing. According the Department of Commerce's Bureau of Economic Analysis, a percentage of disposable income, personal savings is currently running above 6% (as opposed to about 2% before the mortgage crisis).

Very negative consumer sentiment is important for the discretionary sector. When sentiment is strong, consumers tend to be willing to spend on discretionary products and services. When sentiment is weak, consumers cut back on discretionary purchases.

Credit is an important consideration too.

Consumer Discretionary Sector SPDR (NYSEArca: XLY) is the benchmark consumer discretionary ETF. It holds automobile, restaurant, hotel and entertainment stocks. Consumer Staples Select Sector SPDR (NYSEArca: XLP) holds companies producing staples. Staples are goods and services deemed essential to consumers.

At current levels, XLY has a Price/Earnings ratio of 17 as compared to 14 for XLP, and 15 for the S&P 500. This means that discretionary companies like Comcast, Disney and Home Depot are priced higher in terms of their earnings compared to staples companies like Coke, Pepsi and Walmart.

One reason for this pricing is the relative popularity of the risk trade coming off the bottom of the market in March of 2009. During this period investors bought staples and shunned all discretionary retail.

An historically volatile sub-sector of consumer discretionary is retail. SPDR S&P Retail ETF (NYSEArca:XRT) holds companies like Dicks Sporting Goods, the Dress Barn, and Footlocker. Traders may find it useful to focus a consumer discretionary position by mixing in a long or short position in XRT.

There are also several Proshares ETFs popular with traders. They are different from the plain vanilla consumer discretionary ETFs in several ways. First, all use leverage-- used either in going long the sector: ProShares Ultra Consumer Goods (NYSEArca:UGE) and ProShares Ultra Consumer Services (NYSEArca:UCC, or to short it: ProShares UltraShort Consumer Goods (NYSEArca:SZK) and ProShares UltraShort Consumer Services (NYSEArca:SCC). Second, these funds are expensive, with expense ratios of 0.95% compared to 0.23% for XLY. Third, these funds tend to shrink and grow in size according to popularity and market direction far more dramatically than other consumer discretionary ETFs. All are probably too speculative and expensive for most investors.

A list of consumer discretionary ETFs follows:

Broad Consumer Discretionary

• Consumer Discretionary Select Sector SPDR (NYSEArca:XLY)
• Vanguard Consumer Discretionary VIPERS (NYSEArca:VCR)

Sub-Sector Consumer Discretionary

• iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NYSEArca:IYK)
• iShares Dow Jones U.S. Consumer Services Sector Index Fund (NYSEArca:IYC)
• SPDR S&P Retail ETF (NYSEArca:XRT)
• Powershares Dynamic Retail Portfolio ETF (NYSEArca:PMR)
• PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEArca:PEJ)
• PowerShares Dynamic Media Portfolio (NYSEArca:PBS)

International Consumer Discretionary

• Global X China Consumer ETF (NYSEArca:CHIQ)
• iShares Global Consumer Discretionary (NYSEArca:RXI)

Fundamental Consumer Discretionary

• PowerShares Dynamic Consumer Discretionary (NYSEArca:PEZ)
• First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca:FXD)
• Rydex S&P Equal Weight Consumer Discretionary (NYSEArca:RCD)

Short and Leverage Consumer Discretionary

• ProShares Ultra Consumer Goods (NYSEArca:UGE)
• ProShares Ultra Consumer Services (NYSEArca:UCC)
• ProShares UltraShort Consumer Goods (NYSEArca:SZK)
• ProShares UltraShort Consumer Services (NYSEArca:SCC)