Concerns About A Hot Consumer ETF

The Consumer Discretionary Select Sector SPDR (NYSE:XLY), the largest exchange-traded fund tracking that sector, is up 13.3 percent year to date and recently touched an all-time high. XLY's 2017 performance is good for one of the best among the sector SPDR ETFs and, as has previously been the case with the ETF, Amazon.com Inc. (NASDAQ:AMZN).

Consumer ETFs And The Weight Of Amazon

Shares of Amazon, which now reside above the $1,000 mark, are up more than 34 percent this year. Simply put, that is a big deal to XLY and other cap-weighted consumer discretionary ETFs because as Amazon's market value grows, so does the stock's prominence in the ETFs that hold it.

Obviously, betting against Amazon has been a foolish wager, which translates to the same for XLY. The ETF allocated 15.2 percent of its weight to Amazon as of June 2, exactly double the weight afforded to Comcast Corporation (NASDAQ:CMCSA), XLY's second-largest holding. Still, some analysts have reservations about XLY.

Don't Bet Against Amazon, But AltaVista Rates XLY Underweight?

For example, AltaVista Research hit XLY with an Underweight rating in a recent note. The research firm rates ETFs Underweight when those funds hold stocks that appear excessively valued or track sectors that have below-average fundamentals. In the case of XLY, valuation is the likely concern.

Based on its 2017 estimates, AltaVista forecasts a price-to-earnings ratio of 20.8 for XLY compared to 18.4 for the S&P 500. The research firm also estimates a 2017 price-to-book ratio of 4.3 for the consumer discretionary ETF compared to 1.8 for the S&P 500.

The Short

Data suggest traders are not lining up to make bearish bets against XLY. The percentage of the ETF's shares outstanding sold short is just 8 percent, one of the lowest among the sector SPDR ETFs, according to AltaVista data. Over the past year, XLY's shares outstanding has increased 7 percent, indicating investors are adding assets to the fund.

While Amazon and bricks-and-mortar retailers duke it out, overall consumer spending appears healthy with the notable exception of autos, according to AltaVista. But tax reform--perhaps including a border adjustment tax--is a wild card for retailers in particular. In any event, the sector trading at the top of its P/E range of the last few years and as a result remains richly valued in our view, both in its own right and vs the S&P 500.

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