Last week, I introduced you to my favorite ETFs in the technology sector. Today, I focus on the next weakest sector, consumer discretionary. Why? To identify sectors that are outperforming and underperforming the market for portfolio considerations.
Since profit-taking continues with the major indexes, many ask if it will turn into a deep market correction? My answer, it is too early to tell and why I continue to watch sector rotation for clues.
Others ask, why waste time with sector rotation?
If in the market, you need to be aware of sector rotation, no matter if you are an investor or a trader. Long-term investors may not care as they tend to hold through everything. In my garden-growing portfolios, if my high dividend-paying funds do not drop their dividends, there is no reason to sell because my goal is to see how fast I can double my shares.
In my trading portfolio, I recognize market shifts as soon as possible and move to different areas as the markets change. I use my Simple Simon trading system to know when to buy or sell. See previous columns for details.
Today, I focus on funds in the consumer discretionary sector.
These industries are the most sensitive to economic cycles and can be broken into manufacturing and service areas. The manufacturing segment includes automotive, textiles, household durable goods, and apparel and leisure equipment. Hotels, restaurants, consumer retailing, and services media production and services are examples of some in the services area.
My favorite consumer discretionary funds ranked by asset size are as follows:
XLY-Consumer Discretionary Select Sector SPDR Fund ETF tracks companies in the Consumer Discretionary Select Sector Index from the following industries: retail; hotels, restaurants, and leisure; textiles, apparel, and luxury goods; household durables; automobiles; auto components; distributors; leisure products; and diversified consumer services. XLY is the largest fund in this group, with assets of 20.6 B and the highest average trading volume of 4.3 M.
VCR-Vanguard Consumer Discretionary Index Fund ETF tracks companies in the MSCI US Investable Market Index/Consumer Discretionary index made up of stocks of large, mid-size, and small U.S. companies within the consumer discretionary sector. VCR has assets of 6.9 B and an average trading volume of 129 K, the lowest traded volume in this group.
FXD-First Trust Consumer Discretionary Alpha DEX Fund ETF tracks companies in the Strata Quant Consumer Discretionary Index, a modified equal-dollar weighted index following consumer discretionary stocks in the Russell 1000. FXD has assets of 7.3 B and an average trading volume of 801 K.
PEJ-Invesco Dynamic Leisure and Entertainment ETF track equities in the Dynamic Leisure and Entertainment Intellidex Index, common stocks of U.S. leisure and entertainment companies. PEJ has assets of 1.79 B and an average daily trading volume of 1.01 M.
FDIS-Fidelity MSCI Consumer Discretionary Index ETF tracks companies in the MSCI USA IMI Information Technology Index. FDIS has assets of 5.4 B and an average trading volume of 1.89 K.
I charted the performance of each fund beginning March 24, 2020, running to real-time. The results and returns by rank are as follows:
FXD-First Trust Consumer Discretionary Alpha DEX Fund ETF (blue line) up 149.72%, VCR-Vanguard Consumer Discretionary Index Fund ETF (red line) up 135.24%, FDIS-Fidelity MSCI Consumer Discretionary Index ETF (green line) up 127.82%, PEJ-Invesco Dynamic Leisure and Entertainment ETF (pink line) up 107.48%. The group laggard, XLY-Consumer Discretionary Select Sector SPDR Fund ETF (purple line) up 92.42%. The market, $SPX (green area), is up 83.12%.
Here are the key points:
1. Bigger is not always better. The largest fund, XLY, was the lowest performer in this group but still outperformed the market ($SPX) by 9.30%.
2. The smallest fund, FDIS, outperformed the market ($SPX) by 44.7%.
3. All of these consumer discretionary funds outperformed the returns of the market ($SPX).
4. These results represent a specific period. Different dates will result in different outcomes.
5. Past performance does not dictate future returns.
Here is what you should think about:
First, if you own similar consumer discretionary funds, how are they performing compared to these funds?
Second, do you know the top ten holdings in your funds?
Third, if you are not tracking your funds' performance, then why?
No one knows when the next large-scale selling begins. The current sector action is signaling that a market top may be in, but it usually takes three to four weeks to get an accurate picture.
I will be watching to see if profit-taking continues within the top-performing sectors and more money flows into healthcare, utility, and consumer staple funds. When this happens, the institutions will short the previous high-flyers and long the sectors moving up.
What's next? I update the overall sector performance and focus on my favorite industrials funds.
In full disclosure, I do not hold any securities in this column.
Plan your work, work your plan, and share your harvest!
David O. England is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to email@example.com.