Bloomberg News

Consumer Discretionary Turns Hot as ETFs Show New Flows

August 07, 2014

Money is starting to flood into exchange-traded funds that focus on media and retail companies, marking a rebound for this year’s worst-performing ETF industry group as U.S. economic growth revives consumer demand.

Investors pumped $1.79 billion into consumer discretionary exchange-traded funds in the five trading days through Aug. 6, the most of any group, according to data compiled by Bloomberg. The funds have still seen $2.04 billion flow out this year, also the most among the different industries.

“It’s been the worst sector, but the economic picture is improving,” Todd Rosenbluth, director of ETF research at S&P Capital IQ in New York, said in an interview. “It’s one of those sectors that should do well.”

The recent turnabout suggests investors are more confident the economy will improve and boost profit for companies such as Starbucks Corp. (SBUX:US) and Comcast Corp. (CMCSA:US) in this year’s second half. Ralph Lauren Corp. (RL:US) and Walt Disney Co. (DIS:US) this week both reported quarterly earnings that exceeded analysts’ estimates, and Rosenbluth said the opportunity for consolidation and acquisitions could also spur investors.

ETFs, which allow investors to trade shares representing a broader index of stocks, are gaining popularity as a way to invest in industries such as apparel, restaurants and entertainment without having to buy multiple equities.

Even with this year’s outflow, the consumer-discretionary funds remain the best performing group in the bull market that started in March 2009.

Biggest ETF

The Consumer Discretionary Select Sector SPDR Fund (XLY:US) -- which includes Burbank, California-based Disney as the biggest of its 84 reported holdings -- is the largest U.S.-based ETF focused on the consumer discretionary companies. The fund accounted for $1.38 billion of the inflow over the past week. Among its top 10 reported holdings are Time Warner Inc. (TWX:US) and Twenty-First Century Fox Inc., (FOXA:US) whose potential combination was scuttled this week when Fox gave up the pursuit.

Disney, Time Warner and Fox this week all reported quarterly earnings that exceeded estimates.

Improvements in the economy should also benefit companies that rely on consumers spending money on goods and services that aren’t necessities. Gross domestic product rose at a 4 percent annualized rate from April through June, exceeding estimates, after shrinking 2.1 percent in the first quarter, the Commerce Department said July 30.

Consumer spending, which accounts for almost 70 percent of the economy, rose at a 2.5 percent pace last quarter, more than twice the rate in the first three months of 2014. The spending may be driven by optimism that job growth will continue after the U.S. economy added 209,000 jobs in July, the sixth straight month of gains above 200,000.

Earnings Results

So far this quarter, 77 percent of the consumer discretionary companies in the Standard & Poor’s 500 Index have exceeded analysts’ earnings estimates, more than the 75 percent average for the full index. All six of the apparel companies that have reported results so far, including New York-based Ralph Lauren, beat profit estimates.

The quarterly earnings results helped push the S&P 500 to a record 1,987.98 on July 24, about a week after the Dow Jones Industrial Average peaked at 17138.20. The indexes have since retreated, influenced in part by Argentina’s default and expanded sanctions against Russia by the U.S. and European Union. The S&P 500 Consumer Discretionary Sector Index has risen about 9.8 percent in the past year.

Price Competition

Even with the economic improvement, some retailers are suffering as consumers continue to bargain-hunt. Target Corp. (TGT:US) this week said second-quarter profit trailed its forecast as revenue at established U.S. stores was little changed, and Wal-Mart Stores Inc. (WMT:US) is reducing prices on 10 percent more items during this back-to-school season.

One reason consumer spending has been slow to rebound since the end of a recession in 2009 is a greater concentration of wealth and income among the richest Americans, said Joseph Stiglitz, a Nobel-prize winning economist and author of “The Price of Inequality.”

Investors may be positioning themselves to benefit from gains in retail companies during the crucial fourth quarter compared with the 2013 season, when bad weather and price competition among retailers hurt sales.

The depressed valuations and easy comparisons could be a compelling opportunity for investors, Lawrence Creatura, who helps oversee $350 billion as a fund manager at Pittsburgh-based Federated Investors Inc. (FII:US), said in an interview.

Holiday Season

“Investors are betting that the worst is behind the retail sector,” Creatura said. “And not only will the data look a bit better going forward but also the valuations are quite inexpensive. Investors are betting that management teams will describe the sun rising again.”

While the turnaround in money flow is only a week old, positive earnings surprises and expectations for mergers among consumer companies may keep investors engaged, S&P Capital IQ’s Rosenbluth said.

“Investors will rotate from one sector to another when signs are encouraging,” Rosenbluth said. “If we see continued earnings growth from that sector, those are good reasons for investors to get exposure through ETFs.”

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Kevin Miller, Stephen West


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Companies Mentioned

  • SBUX
    (Starbucks Corp)
    • $75.81 USD
    • 0.97
    • 1.28%
  • CMCSA
    (Comcast Corp)
    • $54.26 USD
    • 1.04
    • 1.92%
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