A Discretionary Idea

03/29/2016 9:00 am EST

Focus: ETFs

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Of all the broad economic sectors, consumer discretionary recently offered one of the most attractive valuations relative to its growth prospects, explains Mark Salzinger, editor of The Investor’s ETF Report.

Consumer discretionary stocks have fallen largely in line with the broader market so far in 2016, but they have outperformed by a wide margin over the past few years.

Over the past three, Consumer Discretionary SPDR (XLY) has gained 16.0% on an annualized basis, vs. 11.6% for the S&P 500.

Despite experiencing about 30% more volatility over those three years than the S&P 500, XLY’s outperformance has still been sufficient to generate superior risk-adjusted returns.

In 2015, XLY actually made money, gaining 9.9% in a year in which the S&P 500 gained only 1.3%.

Recently, average earnings growth for XLY was estimated at 12.3%, vs. 9.5% for the S&P 500.

Despite above-average growth potential, XLY does not have a particularly rich valuation. Its price/earnings ratio on 2016 forecast earnings was recently 17.4, vs. 16.6 for the S&P 500.

On a P/E-to-growth (PEG) basis, XLY is particularly attractive (PEG of 1.41, vs. 1.75 for the S&P 500).

This sector is a catchall for consumer-oriented companies whose sales and earnings are more economically sensitive than the food, beverage, household products and tobacco companies that make up the consumer staples sector.

Discretionary stocks include media companies, both content providers like Disney (DIS) and content networks like Time Warner Cable (TWC), hotels, restaurants, apparel, luxury goods and automobiles.

They also include retailers of all stripes, including online retailers like Amazon.com (AMZN) and brick-&-mortar retailers in a host of specialties; XLY’s top holdings include such disparate lines as Home Depot (HD), Target (TGT), TJX (TJX) and Dollar General (DG).

XLY is our preferred ETF in this sector. It invests in the 86 consumer discretionary stocks that are members of the S&P 500 Index.

XLY is also largest by assets, with more than $10.1 billion in assets. It levies a 0.14% expense ratio.

Subscribe to The Investor’s ETF Report here…

By Mark Salzinger, editor of The Investor’s ETF Report.

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