Resilient Consumer Good for Some ETFs, S&P Says

Despite a turbulent year on the economic data front, the U.S. consumer has remained surprisingly resilient. That is good news on multiple fronts. First, in an oft-cited statistic, the consumer accounted for more than two-thirds of U.S. GDP.

Second, consumers that are feeling good about the broader and their own personal economies can be a boon for myriad ETFs. Consumer discretionary ETFs jump to the top of that list and more gains could be on the way.

"With Standard & Poor's Economics predicting a 20%-25% chance of another recession, such concerns are only exacerbated by a looming fiscal cliff and uncertainties related to the upcoming presidential elections," S&P Capital IQ said in a research note. "Even so, consumers are still hanging on -- despite the additional squeeze of gas prices -- amid a palpable bifurcation that has seen the economy increasingly rely on higher-end consumers."

S&P Capital IQ is correct. The consumer is "hanging on" if the performance of some major discretionary ETFs is any indication. The issue of rising gas prices cannot be overlooked, particularly in California, the largest U.S. state. Gas prices there set a record on Saturday only to break the record on Sunday. The U.S. Gasoline Fund (NYSE:UGA) has jumped 27.1 percent year-to-date.

Despite the cautionary tale being told by gas prices, there could be more upside ahead for discretionary equities and ETFs.

"S&P Capital IQ consensus estimates for the larger-cap Consumer Discretionary constituents are for fourth quarter operating EPS growth of 16.5% (versus 4.7% in the third quarter), and 7.0% for the full year in 2012," the research firm said. "This compares favorably to the broader S&P 500 Index, with a projected fourth quarter earnings growth of 10.0% (after a 1.7% decline in the third quarter), and 4.0% increase for the full year. In addition, despite a sustained rally and multi-year relative outperformance, we believe the sector's valuation remains relatively attractive. Based on Capital IQ consensus estimates for 2013, we note that the Consumer Discretionary sector's P/E-to-growth ratios of 0.9X for the larger cap constituents and 1.2X for both mid and smaller cap are at notable 10%-25% discounts to the respective broader market indices."

In the note, S&P places an Overweight rating on three discretionary ETFs, including the behemoth of the group, the Consumer Discretionary Select Sector SPDR (NYSE:XLY). Home to $3.3 billion in assets under management, XLY has surged 22 percent this year. XLY's top-10 holdings include Comcast (NASDAQ:CMCSA), Walt Disney (NYSE:DIS), Amazon (NASDAQ:AMZN) and Home Depot (NYSE:HD). XLY is also the least expensive discretionary ETF with an expense ratio of just 0.18 percent.

The Market Vectors Retail ETF (NYSE:RTH) also earned an Overweight rating from S&P. That ETF has also gained about 22 percent year-to-date. Wal-Mart (NYSE:WMT), Home Depot and Amazon combine for 34 percent of RTH's weight. RTH has an expense ratio of 0.35 percent.

"A closer scrutiny of the underlying inputs shows that both XLY and RTH appear to be primarily recommended by demonstrably superior cost considerations on such parameters as expense ratio and bid/ask spread, with the latter also exhibiting favorable risk considerations, as defined by S&P Quality Rank," S&P said in the note.

The Global X Auto ETF (NYSE:VROM) also earned an Overweight rating from S&P, but investors should proceed with caution with this fund. VROM will cease trading after October 18 and be liquidated on October 26.

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