It's increasingly clear that the polar vortex created havoc for retailers. As the snow piled up and temperatures plunged, many consumers simply stayed away from the malls. You can expect to hear all about it as earnings season unfolds.
But a late winter thaw may have set the stage for much better days to come. And this lagging sector could deliver much better news as coming quarters unfold.
Analysts at Deutsche Bank suspect that the end of the deep freeze in early March coincided with a profound change in economic activity: "The March economic data have bounced back sharply after being severely depressed in January and February," they wrote this week, adding that "this weather-related payback is most evident in motor vehicle sales and the index of aggregate hours."
And though the widely followed Redbook store sales survey showed continued weakness in March, the International Council of Shopping Centers (ICSC) survey, "which is adjusted for moving holidays (unlike Redbook), suggests a pickup in sales," notes UBS analyst Maury Harris.
Another reason to anticipate a more confident consumer: They are finally getting raises. In the monthly sentiment snapshot conducted by the National Federation of Independent Businesses (NFIB), a net 23% of surveyed employers boosted employees' salaries, which is the strongest showing since 2008. "The reported gains in compensation are now solidly in the range typical of an economy with solid growth," the NFIB's economists said.
For consumers, the green light to spend will come when they feel that the nation's employment picture is on a firmer path. When the pace of new non-farm job creation fell below 100,000 in December, many consumers suffered an unpleasant sense of déjà vu. Yet in each of the past two months, more than 190,000 jobs have been created -- and the spring thaw may push that figure above 200,000 in coming months. That will coincide the summer holiday season and then the all-important back-to-school season.
That makes this a good time to revisit those lagging consumer discretionary ETFs. Here are my top picks.
|1. Consumer Discretionary Select Sector SPDR (NYSE: XLY)|
|The SPDR ETFs always appeal, simply because they sport very low expense ratios (0.18% in this case). The fund brings broad-based exposure to retail firms, restaurants, media companies, apparel and luxury goods companies, automakers and leisure firms, spread among 84 stocks, according to Morningstar. Investors can get similar broad exposure and low fees by investing in the Vanguard Consumer Discretionary ETF (NYSE: VCR) or the iShares US Consumer Services ETF (NYSE: IYC).|
|2. First Trust Consumer Discretionary AlphaDEX ETF (NYSE: FXD)|
|While those big funds build set-it-and-forget-it portfolios, this ETF takes a more active approach, periodically rebalancing the portfolio towards consumer discretionary stocks that offer especially appealing growth and/or value metrics. That portfolio churn comes with a price: The net expense ratio of 0.70% is fairly stiff.
What do you get for that level of active management? This fund has returned 28% annually over the past five years, which exceeds the returns of the funds mentioned above.
|3. PowerShares S&P SmallCap Consumer Discretionary ETF (NYSE: PSCD)|
|As its name implies, this fund is focused on smaller companies. The average holding has a $1.4 billion market value, compared with an average $40 billion market cap for the big low-cost funds. The 0.29% expense ratio is very competitive for such a niche ETF, and the 19% three-year annualized is right in line with its larger-cap peers. This ETF has a four-star rating from Morningstar, but a quick scan of its top portfolio holdings implies that investors should expect a fair degree of volatility. |
|4. iShares MSCI Emerging Markets Conusmer Discretionary ETF (NYSE: EMDI)|
|Though I've focused mostly on the health of consumers in the U.S., I still believe that consumers in emerging markets are still one of the most unheralded investment themes of the early 21st century. So many countries are only now experiencing the kind of foundation-laying growth factors that we here in the U.S. saw back in the 1950s.
This ETF, which carries a 0.67% expense ratio, has nearly one-third of the portfolio invested in South Korean companies, with smaller but still-large stakes in South African, Chinese and Brazilian companies. All of these countries have shown a clear focus on consumer-oriented export opportunities and are proxies for regionwide growth, not just growth in their countries.
Risks to Consider: A fresh pullback in employment trends would again put the consumer in a sour mood, so it is wise to track our economy's progress as you increase your exposure to this cyclical sector.
Action to Take --> Focusing on 2014 as the year of the rebounding consumer misses the point. Instead, focus on the fact that consumers -- in the U.S. and worldwide -- have been under duress for half a decade and are only now coming out of hibernation. That sets the stage for a multi-year improvement in spending in consumer discretionary goods and services. It pays to look at the specific portfolio of each of these ETFs to make sure you own the kinds of companies you believe can best prosper from this long-term trend.