The US consumer rebound is coming

After a cold, hard winter, spending is heating up with the weather. Here are 4 investments for riding that trend.

By StreetAuthority Apr 11, 2014 3:48PM
Shoppers walk around the Mall of America in Bloomington, Minnesota on Feb. 25, 2012 (© Ariana Lindquist/Bloomberg via Getty Images)By David Sterman

It's increasingly clear that the polar vortex created havoc for retailers. As the snow piled up and temperatures plunged, many consumers simply stayed away from the malls. You can expect to hear all about it as earnings season unfolds.

Investors have already responded, shunning consumer stocks, and the key ETFs (exchange-traded funds) that track consumer discretionary spending are all under water for the year. As Citigroup analysts noted, "The worst performing sector thus far in 2014 is Consumer Discretionary, with the retailing industry group plummeting nearly 8 percent this year."

But a late winter thaw may have set the stage for much better days to come. And this lagging sector could deliver much better news as coming quarters unfold.

Analysts at Deutsche Bank suspect that the end of the deep freeze in early March coincided with a profound change in economic activity: "The March economic data have bounced back sharply after being severely depressed in January and February," they wrote this week, adding that "this weather-related payback is most evident in motor vehicle sales and the index of aggregate hours."

And though the widely followed Redbook store sales survey showed continued weakness in March, the International Council of Shopping Centers (ICSC) survey, "which is adjusted for moving holidays (unlike Redbook), suggests a pickup in sales," notes UBS analyst Maury Harris.

Another reason to anticipate a more confident consumer: They are finally getting raises. In the monthly sentiment snapshot conducted by the National Federation of Independent Businesses (NFIB), a net 23 percent of surveyed employers boosted employees' salaries, which is the strongest showing since 2008. "The reported gains in compensation are now solidly in the range typical of an economy with solid growth," the NFIB's economists said.

For consumers, the green light to spend will come when they feel that the nation's employment picture is on a firmer path. When the pace of new non-farm job creation fell below 100,000 in December, many consumers suffered an unpleasant sense of déjà vu. Yet in each of the past two months, more than 190,000 jobs have been created -- and the spring thaw may push that figure above 200,000 in coming months. That will coincide the summer holiday season and then the all-important back-to-school season.

That makes this a good time to revisit those lagging consumer discretionary ETFs. Here are my top picks.

1. Consumer Discretionary Select Sector SPDR (XLY)​
The SPDR ETFs always appeal, simply because they sport very low expense ratios (0.18 percent in this case). The fund brings broad-based exposure to retail firms, restaurants, media companies, apparel and luxury goods companies, automakers and leisure firms, spread among 84 stocks, according to Morningstar. Investors can get similar broad exposure and low fees by investing in the Vanguard Consumer Discretionary ETF (VCR) or the iShares US Consumer Services ETF (IYC).​

2. First Trust Consumer Discretionary AlphaDEX ETF
While those big funds build set-it-and-forget-it portfolios, this ETF takes a more active approach, periodically rebalancing the portfolio towards consumer discretionary stocks that offer especially appealing growth and/or value metrics. That portfolio churn comes with a price: The net expense ratio of 0.70 percent is fairly stiff.

What do you get for that level of active management? This fund has returned 28 percent annually over the past five years, which exceeds the returns of the funds mentioned above.

3. PowerShares S&P SmallCap Consumer Discretionary ETF
As its name implies, this fund is focused on smaller companies. The average holding has a $1.4 billion market value, compared with an average $40 billion market cap for the big low-cost funds. The 0.29 percent expense ratio is very competitive for such a niche ETF, and the 19 percent three-year annualized is right in line with its larger-cap peers. This ETF has a four-star rating from Morningstar, but a quick scan of its top portfolio holdings implies that investors should expect a fair degree of volatility. ​

4. iShares MSCI Emerging Markets Conusmer Discretionary ETF (EMDI)​
Though I've focused mostly on the health of consumers in the U.S., I still believe that consumers in emerging markets are still one of the most unheralded investment themes of the early 21st century. So many countries are only now experiencing the kind of foundation-laying growth factors that we here in the U.S. saw back in the 1950s.

This ETF, which carries a 0.67 percent expense ratio, has nearly one-third of the portfolio invested in South Korean companies, with smaller but still-large stakes in South African, Chinese and Brazilian companies. All of these countries have shown a clear focus on consumer-oriented export opportunities and are proxies for regionwide growth, not just growth in their countries.

Risks to consider: A fresh pullback in employment trends would again put the consumer in a sour mood, so it is wise to track our economy's progress as you increase your exposure to this cyclical sector.

Action to take:
Focusing on 2014 as the year of the rebounding consumer misses the point. Instead, focus on the fact that consumers -- in the U.S. and worldwide -- have been under duress for half a decade and are only now coming out of hibernation. That sets the stage for a multi-year improvement in spending in consumer discretionary goods and services. It pays to look at the specific portfolio of each of these ETFs to make sure you own the kinds of companies you believe can best prosper from this long-term trend.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

Apr 11, 2014 5:16PM
Just another typical MSN article hyping how wonderful everything is.  When does this crappy journalism stop and when will they start writing articles that is the truth?
Apr 11, 2014 4:46PM

rebound?  like the economic recovery we've all been "experiencing"?   Its time to start stockpiling goods,  before inflation and the market crash comes.  

Good luck to you all, I think we are going to need it

Apr 12, 2014 8:45AM

Sure it is...

But I'd bet the democrat parasites will vote themselves more of the money people earn.  This will nip that in the bud. 

Apr 13, 2014 8:02AM

articles like this shouldn't be printed,   it is really misleading,  all one has to do is read what is going on with the U.S. and the IMF the clock is ticking on our country,  and we have one last election to do something,   

The politicians people have put into office aren't doing their jobs for us,  monetary policy is being put solely on the central banks,  their inability to act,  be proactive to a changing global landscape is becoming more than an issue. 

please vote with the future in mind,  cause voting for today isn't cutting it anymore.  

Apr 11, 2014 9:32PM
I beg to differ. I am hoarding cash like no tomorrow. This market is overblown, look at 2008 and tell me what has changed? NOTHING. This bubble is going to burst like no other. Maybe later than sooner but I will not participate. Anyone talking about the student loan debt being larger than the home loan debacle? Notta. Good luck. That's right your gambling now folks and the house is going to win.
Apr 12, 2014 6:19PM
Apr 11, 2014 8:46PM
The US consumer rebound is coming....... David???....... Really???  I for one won't spend another dime on any discretionary items until I see companies get up off their piles of record earnings and do some more hiring. Also, I'll need to see more wage increases for the middle class before I start spending again. Companies need to make the commitment first (this time around) rather than waiting for all the "stars to align" in their favor. 
Apr 11, 2014 4:20PM
Just like that dead cat bounce today in technologies?
Apr 13, 2014 11:09AM
Consumer is DEAD no jobs low pay and a mountain of DEBT !  Consumers on a slow march to the cemetery !  There is your economic Recovery !
Apr 11, 2014 5:21PM
David Sterman--- in a pinch to make your debt obligations? Did you pen an article you knew Kool Aid would buy? Perhaps your tunnel vision only labels stupid psychopathic nutcase texters as the consumer? What is it?

From Big to the most suppressed of us-- the observation is easy to see-- FAILURE and it's picking up momentum. Coldwater Creek is going under-- what will grandma wear? Thrift stores are trying to attract customers (think that one all the way through). The weather has nothing to do with getting the consumer to spend... paying family sustaining wages, actually hiring people other that Linked In alumni, pulling pretentious arrogant ignorant false elitists out of high places might do it. 
I doubt if we can make the correction moves now. The Federal Reserve condemned us to a really LONG economic-barren winter, regardless of the air temperature. 
Apr 12, 2014 11:38AM
It's not like I've been saving the whole time. The money I spent on heat killed off what I would otherwise use to shop. Less cold weather is not a big motivator for me. Just being able to feel my nuts is good enough. 
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