Consumer Discretionary ETFs: Alive and Well

The U.S. consumer may be dead, but consumer discretionary ETFs are very much alive. Written off by many investors because of troubles facing consumers-- credit card debt, collapsing home values, and unemployment, these ETFs have recently advanced quickly and decisively.

Consumer discretionary ETFs hold companies producing products and services deemed non-essential, like automobiles, restaurants, hotels, and entertainment. They are highly cyclical and sensitive to consumer and investor sentiment. When times get tough, consumers continue spending on staples but cut back on discretionary purchases. Consumer discretionary ETFs tend to underperform the benchmark. When consumer sentiment turns up, exposure to the discretionary sector provides lift few sectors can match.

Performance in the consumer discretionary is often compared with performance in the consumer staples sector. The chart below shows how on a 1-year basis the Consumer Discretionary Sector SPDR (NYSEArca:XLY) has outperformed both the Consumer Staples Sector SPDR (NYSEArca:XLP) and the benchmark Standard and Poors Depositary Receipts (NYSEARca:SPY).

Because of their sensitivity, consumer discretionary ETFs are closely watched. Some investors believe that they provide an indication overall health of the U.S. and world economies. According to the XLY indicator, the U.S. economy looks better short term than long. In contrast to the chart above, the same chart on a longer (3-year) term basis shows consumer staples far ahead and discretionary lagging.

A good choice for many investors interested in the consumer discretionary sector is the Vanguard Consumer Discretionary ETF (NYSEArca:VCR). VCR tracks the MSCI U.S. Investable Market Consumer Discretionary index. This index is pretty broad, combining service and manufacturing-- automotive, household durables, textiles, hotels, restaurants and leisure offerings.

In addition to broad consumer discretionary funds like XLY and VCR, the stable of consumer discretionary ETFs includes several funds specialized in specific sub-sector markets. Barclays, for example, divides consumer discretionary into goods and services. The chart compares the 1-year performance between iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NTSEArca:IYK) and iShares Dow Jones U.S. Consumer Services Sector Index Fund (NYSEArca:IYC).

The chart shows services outperforming goods. Some of the consumer discretionary sectors outperformance compared to the benchmark is due to services.

Retail is an important sub-sector of consumer discretionary. SPDR S&P Retail ETF (AMEX:XRT) focuses on retail companies. XRT holds companies like Expedia, OfficeMax and Whole Foods Market. The retail sector is typically still more volatile than broad-based consumer discretionary ETFs like XLY.

There are also several Proshares ETFs popular with traders. They are different from other 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 a 0.20% for VCR and 0.23% for XLY. Third these funds tend to shrink and grow in size according to popularity and market direction far mor 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 (AMEX:XLY)

Vanguard Consumer Discretionary VIPERS (NYSEArca:VCR)

Sub-Sector Consumer Discretionary

iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NTSEArca:IYK)

iShares Dow Jones U.S. Consumer Services Sector Index Fund (NYSEArca:IYC)

SPDR S&P Retail ETF (AMEX:XRT)

Powershares Dynamic Retail Portfolio ETF (NYSEArca:PMR)

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ)

PowerShares Dynamic Media Portfolio (PBS)

PowerShares Dynamic Retail Portfolio (PMR)

PowerShares Dynamic Telecommunications & Wireless Portfolio (PTE)

International Consumer Discretionary (Note: these funds that are currently extremely small. Investors must assume risk of potential closure).

SPDR S&P International Consumer Discretionary Sector ETF (IPD)

WisdomTree International Consumer Cyclical Sector Fund (DPC)

Fundamental Consumer Discretionary

PowerShares Dynamic Consumer Discretionary (NYSEArca:PEZ)

First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca:FXD)

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)