Discretionary ETFs: Same Sector, Different Returns

It is getting to be that time of year. The time when retail stocks come into the spotlight due to the holiday shopping season and that means plenty of investors will be giving discretionary ETFs careful consideration. That is not a bad idea, given that the discretionary sector is usually a strong November performer.

The sector also has a tendency to deliver solid returns to investors into the first quarter as well. Speaking of returns, not all discretionary ETFs are created equal, something S&P Capital IQ points out in a recent research note.

"Thus far in 2012, some of the best performing sub-industries in the consumer discretionary sector are cable & satellite, homebuilding, household appliances and Internet retail. All of these are up more than 30% this year. In contrast, auto parts & equipment, casino & gaming, footwear and restaurants are all in the red," according to the note.

In other words, discretionary ETFs with large weights to stocks such as Amazon (NASDAQ:AMZN) and Comcast (NASDAQ:CMCSA) have performed well, but those performances have been hampered by exposure to stock such as Las Vegas Sands (NYSE:LVS) and AutoZone (NYSE:AZO).

"For one of the best performing groups, homebuilding, there is a negative fundamental outlook," S&P Capital IQ notes. "Meanwhile, two of the largest sub-industries, movies & entertainment and cable & satellite, have neutral outlooks."

Home to 82 stocks, the Consumer Discretionary Select Sector SPDR (NYSE:XLY) is the largest discretionary ETF by assets with $3.35 billion. Comcast, Amazon and Priceline (NASDAQ:PCLN) combine for about 15 percent of that fund's weight. By comparison, Nike and five auto-related retailers combine for less of XLY's than Comcast alone. XLY garnered a Marketweight rating from S&P.

The $311.1 million iShares Dow Jones U.S. Consumer Services Sector Index Fund (NYSE:IYC) is a standout among discretionary ETFs, according to S&P. The firm rated IYC Overweight. Comcast, Amazon and eBay (NASDAQ:EBAY) combine for 12.3 percent of the ETF's weight. Although IYC is home to almost 190 stocks, that broad lineup includes just six auto-related names and only token exposure to casino names. Combined, Las Vegas Sands, Wynn Resorts (NASDAQ:WYNN) and MGM International (NYSE:MGM) represent less than three percent of IYC's weight.

The Market Weight-rated Vanguard Consumer Discretionary ETF (NYSE:VCR) devotes just 2.3 percent of its weight to auto retailers and 2.4 percent of its weight to casino names. Conversely, cable and Internet retail stocks combine for 18 percent of the fund's weight.

Among the trio of discretionary ETFs highlighted by S&P, the leader in year-to-date returns is IYC. Up 18.6 percent this year, the iShares fund nudges VCR and its 18.4 percent gain for top honors among major discretionary ETFs. IYC has also been significantly less volatile than XLY and VCR. IYC's year-to-date volatility is 12.5 percent compared to 14 percent for XLY and 14.7 percent for VCR.

IYC is the most expensive of the trio in terms of fees at 0.47 percent per year. XLY is the cheapest with an annual expense ratio of 0.18 percent. VCR charges 0.19 percent.

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