Previously high-flying consumer discretionary ETFs have wilted in recent weeks due to diminished risk appetite in August, a month that saw noticeable outflows from U.S. equity ETFs.
Consumer staples funds, often favored as a shelter from the storm plays, have been slammed rising interest rates.
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Coming off a weak August, many market participants are focused on September's reputation for being the worst month of the year for stocks. However, seasonal trends also indicate that going long consumer stocks toward the end of this month can be a winning trade. S&P Capital IQ likes some of the largest retailers in the U.S.
"Our fundamental outlook for both the hypermarkets & super centers and general merchandise stores sub-industry groups for the next 12 months is positive. With both groups having under-performed the broader market by 6 and 1 percentage points, respectively,year-to-date through August 30, we think certain stocks within these groups are poised for out performance going forward driven by (1) relatively more defensive fundamental characteristics, (2) market share growth opportunities as a struggling low-end consumer seeks out value, and (3) recently lowered investor expectations," said S&P Capital IQ in a new research note.
The research firm has a four-star rating on Dow component Wal-Mart (NYSE:WMT), the world's largest retailer, and a three-star rating on Costco (NASDAQ:COST). Both are among the equity investments held by legendary value investor Warren Buffett and both stocks are top-10 holdings in popular consumer staples ETFs such as the Consumer Staples Select Sectors SPDR (NYSE:XLP) and the Vanguard Consumer Staples ETF (NYSE:VDC).
Last week, S&P Capital IQ listed XLP and VDC among 13 ETFs with favorable risk traits and the firm rates both funds Overweight. However, both have been punished by rising interest rates. XLP and VDC have each lost 5.5 percent in the past month.
The Market Vectors Retail ETF (NYSE:RTH) has been slightly less bad than XLP and VDC over the past month with a loss of just under five percent. RTH is small with just $41.1 million in assets under management, but the fund has impressed with a 20.1 percent year-to-date return.
RTH allocates a combined 18.2 percent of its weight to Wal-Mart, Costco and Target (NYSE:TGT), which S&P also has a four-star rating on. The research firm rates RTH Overweight.
"Hypermarkets & Super Centers is the largest sub-industry weighting, at 14% of assets. This fund holds WMT (largest holding, 9% of assets), COST (6th largest, 5%) and TGT (7th largest, 5%). It currently carries S&P Capital IQ Equity Research's highest overall ETF Ranking of Overweight, driven partly by above-average S&P Capital IQ Quality Ranking and Risk Assessment inputs," S&p Capital IQ said regarding RTH.
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Disclosure: Author owns none of the securities mentioned here.
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