When referring to the health of the U.S. economy there is no way the consumer cannot be the first topic of interest. Considering that consumer spending makes up 70% of the economy, without the consumer the U.S. economy could be in loads of trouble.When the spending is broken down further the numbers show that 7% comes from durable goods, such as autos. The non-durable goods make up 16% of the GDP and they include food and clothing. The reason this number is much higher can be attributed to the fact Americans love to spend on discretionary goods and that food costs are rising. (For more information, check out Using Consumer Spending As A Market Indicator.)
TUTORIAL: Exchanging-Traded Funds
The consumer staples are the good we all buy and use on a regular basis regardless of the economy; they include food, drugs and household products. This sector typically will underperform in a bull market because investors are buying more aggressive sectors. But, in a bear market they tend to outperform because regardless of the economy the staples will be bought.
The SPDRs Consumer Staples ETF (NYSE:XLP) is composed of a basket of 43 stocks, mainly in the food and household products categories; the largest holdings are Proctor & Gamble (NYSE:PG), Philip Morris (NYSE:PM) and Wal-Mart (NYSE:WMT). The top three make up one-third of the ETF, lowering the diversification typically achieved with a basket of stocks. Year-to-date the ETF is up 8.15%, better than double the S&P 500, and is only 1% from an all-time high. The ETF charges a 0.2% expense ratio and pays out a 2.5% dividend.
The consumer discretionary companies are those that sell nonessential goods and services retailers and autos. The Vanguard Consumer Discretionary ETF (NYSE:VCR) is made up of 369 stocks and the stop 10 make up one-third of the allocation. The three largest holdings include McDonald's (NYSE:MCD), Walt Disney Company (NYSE:DIS) and Comcast Corp (Nasdaq:CMCSA). The ETF has a dividend yield of 1.0% and charges an expense ratio of 0.24%. Year-to-date VCR is up about 6.4%, beating the market, but lagging XLP. (For more information in ETF, read Sharpen Your Portfolio With Intelligent ETFs.)
Most investors forget that there is more to the consumer sector than just U.S. citizens. There are consumers around the world that offer different spending trends as well as diversification to a portfolio.
The EG Shares Emerging Markets Consumer ETF (NYSE:ECON) invests in consumer-related stocks that are based in emerging market countries. The ETF is composed of general retailers, food and beverage, media, autos and more. The 30 stocks in the portfolio seek to profit from the growing of the middle class in the emerging market countries as this demographic spends more of their disposable income. Year-to-date the ETF is lagging the market with a loss of 1.9%. The net expense ratio is 0.85% and there is no dividend.
The Right ETF
Most investors will assume that buying one of the ETFs mentioned is enough to account for exposure to the consumer in a portfolio. That may not be the case. As you can see, the performance in 2011 alone varies greatly and each ETF focuses on a specific sub-sector of the consumer. A general rule is that during a strong bull market XLP will lag with VCR and ECON outperforming and during a bear market it will be the exact opposite. (To help you find the right ETF, check out 5 Ways To Find A Winning ETF.)