The US economy grew at a faster than expected rate in the third quarter of this year, buoyed much by an increase in consumer spending, however, is still not growing at a rate to generate new jobs.  Despite this, a ray of light may shine on sectors driven by consumer spending enabling the Consumer Discretionary Select Sector SPDR (XLY), the Vanguard Consumer Discretionary (VCR), the PowerShares Dynamic Consumer Discretionary (PEZ) and the Retail HOLDRs (RTH) to reap the benefits.

According to the Commerce Department, consumer spending, this accounts for nearly 70 percent of US GDP, increased by 2.4 percent annually during the third quarter of this year.  Furthermore, retail sales rose in each of the three months in the third quarter with a further detail indicating that this rise is broad based. 

As for the next few months, the National Retail Federation expects the upcoming holiday season to be the best one in the past four years with sales increasing by 2.3 percent from a year ago.   With this in mind, retailers like Wal-Mart (WMT), Target (TGT) and Amazon (AMZN) are likely to witness increased sales from the previous year. 

The recent increases in consumer spending and the expected holiday season increases are likely being driven by the fact that some consumers believe that the economic recovery in the US is intact and the labor markets can’t get much weaker than they currently are.  Additionally, it appears that some consumers who pushed essential purchases back during the height of the Great Recession are finally starting to loosen their grip on their wallets. 

Although it appears that the aforementioned ETFs have already absorbed the blows dealt with consumers reluctant to spend, a weak labor force and weak consumer sentiment, it is equally important to consider the forces that could hinder them.  Some of these forces include deflation, inflation, and a stubbornly weak real estate sector which could take a further blow due to enhanced foreclosures hitting the market.

A good way to protect against these forces is through the use of an exit strategy which identifies specific price points at which downward price pressure could prevail.  Such a strategy can be found at

  • Consumer Discretionary Select Sector SPDR (XLY), which holds 81 different stocks that are driven by consumer spending.  Top holdings include fast food giant McDonald’s Corp (MCD), Walt Disney (DIS) and Amazon.
  • Vanguard Consumer Discretionary (VCR), which is the most diverse ETF of its kind with 378 holdings.  VCR includes Amazon and Target in its top holdings
  • PowerShares Dynamic Consumer Discretionart (PEZ), which is a mid-cap blend of 60 holdings.  PEZ top holding is luxury retailer Coach (COH).
  • Retail HOLDRs (RTH), which is heavily concentrated on discount retailers.  RTH allocates 19.48 % of its assets to Wal-Mart, 10.93% to Amazon and 8.68% to Target.

Disclosure: No Positions


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