Consumer discretionary ETFs continue strong year as Starbucks and Amazon provide boost

Jul 29th, 2015 | By | Category: Equities

ETFs tracking the consumer discretionary sector have performed well this year, with the LSE and Deutsche Börse-listed SPDR S&P Consumer Discretionary Select Sector UCITS ETF (SXLY) and NYSE-listed iShares Global Consumer Discretionary ETF (RXI) having appreciated by 9.3% and 8.9%, respectively, since January 1st, considerably above the essentially flat return of the S&P 500 over the same period.

Consumer Discretionary ETFs continue strong year as Amazon and Starbucks provide

Strong quarterly results from Starbucks and Amazon have pushed consumer discretionary ETFs higher.

The SPDR S&P Consumer Discretionary Select Sector UCITS ETF (SXLY), which is listed on the London Stock Exchange in USD and the Deutsche Boerse in EUR, with a US version boasting $11.2bn in AUM trading on the NYSE Arca, offers exposure to US-listed firms marketing non-essential consumer goods. The fund ended last week strongly when it opened 1.7% higher on Friday following favourable earnings reports from consumer giants Amazon and Starbucks.

Amazon’s share price surged as much as 17% during after-hours trading on Thursday last week on the back of a positive quarterly earnings report. The company reported earnings of 19 cents a share, far beyond estimates of a loss of 14 cents per share. Due to the jump in price, Amazon’s market capitalisation pushed past that of Walmart, the largest brick-and-mortar retailer, for the first time.

Overall, revenue for Amazon’s home North American market grew 26% year-on-year, highlighting the firm’s ability to attract customers through wider product ranges and efficient, speedy delivery. Amazon has been a leader in revolutionising the industry through technological advances. Robots play a major role in warehousing functions, cutting labour costs and improving delivery times. The upcoming ‘Amazon Prime Air’, which plans to use unmanned drones to deliver parcels to the customer’s doorstep, has a planned delivery time of 30 minutes or less.

Starbucks was also a major contributor with shares rising 4.7% during after-hours trading last Thursday. The stock price is up 39.7% year-to-date. Starbucks reported profit of $627m, or 41 cents per share, from total revenue of $4.9bn. The firm has been able to grow revenues within existing sites through the introduction of mobile ‘order and pay’ apps, which allow customers to bypass long queues during traditional peak periods. The firm has also teamed up with companies such as Lyft, the ride-sharing service, and Spotify, to attract new customers through offering the chance to earn ‘stars’ which can be redeemed for discounted purchases at any Starbuck’s branch.

The SPDR S&P Consumer Discretionary Select Sector UCITS ETF was well placed to benefit from the jumps in share prices of these two firms as they both represent significant weights: Amazon (7.7%) and Starbucks (3.5%).

Investors wishing to gain broader exposure to the consumer discretionary sector may consider the NYSE Arca-listed iShares Global Consumer Discretionary ETF (RXI).The fund maintains a large weighting towards the US (59.2%), but also provides exposure to Japan (13.9%), the United Kingdom (6.3%), France (5.8%), and Germany (5.7%). Top holdings include Toyota (4.8%), Walt Disney (4.5%), and Amazon (4.5%).

RXI’s main country exposures outside the US have, for the most part, posted strong consumer confidence indicators according to a recent report by Nielson, the global information measurement company. Japan, although posting an index score of 82 which is below the world average of 97, increased their consumer confidence index level by nine points since the last quarter, one of the greatest gains globally. Consumer confidence in the UK has increased for the sixth successive quarter; its consumer confidence index rose two points to 99 since last measurement, moving ahead of the global average for the first time since 2006. A decisive election victory for the Conservative party in May was seen as generally beneficial for continued recovery of the economy and was cited as one of the main reasons for continuing the upward momentum. Consumer confidence in Germany grew modestly but remains above the global average with an index rating of 100. France is considerably below the global average, although its index rose by three points to 60. Consumer confidence in the US remains robust with an index score of 107.

The iShares MSCI Emerging Markets Consumer Growth UCITS ETF (CEMG), trading on the London Stock Exchange in USD and GBP, and on the Deutsche Boerse in USD, offers insight into the consumer discretionary markets away from the developed world. The fund tracks the MSCI ACWI Emerging Markets Consumer Growth Index and includes firms listed on developed market exchanges that derive a significant amount of revenue from within emerging markets. As such the fund currently has country exposure to the US (21.5%), the United Kingdom (9.0%) and Switzerland (7.4%), but is also exposed to China (13.6%), South Korea (8.4%), South Africa (6.3%) and Mexico (4.5%). The fund is up 3.0% since the start of the year, highlighting a slower recovery in consumer growth outside of the developed world. The top holdings of the fund include Apple (5.1%), Tencent Holdings (4.5%), China Mobile (3.8%), Philip Morris (3.8%) and Johnson & Johnson (3.3%).


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