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Why We Favor Consumer Discretionary

S&P Capital IQ announced an upgraded recommendation on the consumer discretionary sector Monday, based on a combination of macroeconomic, fundamental and seasonal factors. Consumer discretionary joins health care and telecom services as overweighted sectors, relative to the S&P 500 index.

Sam Stovall, US equity strategist for S&P Capital IQ, thinks the sector can benefit from a low unemployment rate and should face a minor impact from small and well-telegraphed Fed funds rate increases. Further he points to Standard & Poor's Economics forecast that consumer spending is projected to increase 3.3% in 2016, up from 3.1% expected in 2015.

Stovall also notes that the consumer discretionary sector is the only S&P 500 sector projected by S&P Capital IQ consensus to generate double-digit EPS growth in the second half of 2015. Meanwhile, earnings are forecasted to grow 15% in 2016, much stronger than the 10% for the S&P 500 index.

Lastly, Stovall highlighted that historically the sector has been among the better performers during the November-April period since 1990. The sector rose on average 10.7%, ahead of the 7.1% for the S&P 500 index.

Consumer Discretionary Select Sector SPDR (XLY) is the largest of the sector focused ETFs, with $10 billion in assets. This is a market-cap weighted ETF tied to the S&P 500 index, with the top-10 holdings comprising 48% of assets. There is a 9% weighting in Amazon.com (AMZN) alone. The ETF has a 0.15% expense ratio and trades more than seven million shares on a daily basis with a $0.01 bid/ask spread.

Investors interested in a more industry focused approach to consumer discretionary may want to consider iShares US Home Construction (ITB) or SPDR S&P Homebuilders (XHB). They both provide exposure to the housing industries, but in different ways.

ITB has two thirds of assets in homebuilders and has a 0.43% expense ratio. Meanwhile, XHB has just one-third in homebuilders, but another third in home furnishing retail, home furnishings and home improvement retail companies; XHB has a 0.35% expense ratio.

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