During earnings season, two ETFs may signal how bullish investors feel about U.S. economy and consumer
- The performance divergence between consumer staples and consumer discretionary sectors can provide a snapshot of how bullish investors are on the economy and strength of the consumer.
Concerns about the consumer are still running high on Wall Street, even after the market’s big comeback to a new record from the tariff-triggered downturn of April. While the worst fears about Trump’s trade policies and inflation have not come to pass, Goldman Sachs is among Wall Street firms expecting a growth slowdown and a more cautious consumer ahead.
As earnings season picks up, one simple market gauge on how bullish or bearish investors are on the consumer can be found in the performance of consumer discretionary and consumer staples ETFs.
As Todd Sohn, senior ETF and technical analyst at Strategas Asset Management explained it on a recent CNBC “ETF Edge” podcast, “If discretionary is outperforming, that means auto, retails, homebuilders, are working against toothpaste and toilet paper. Adversely, if the staples are outperforming, that means the market does not like the earnings and would suggest a more defensive tone,” said.
Into earnings season, consumer discretionary ETFs have outperformed consumer staples.
Over the past month, top consumer discretionary ETFs have outperformed consumer staples funds, such as the First Trust Consumer Discretionary AlphaDEX ETF (FXD) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS).
Looking at the oldest and broadest consumer funds in the ETF space, within the Select Sector SPDR family that tracks all of the major sectors within the S&P 500 on a stand-alone basis, there’s been a reversal in performance of late. The Consumer Staples Select Sector SPDR (XLP) is up 4% this year but only 1% in the past month. The Consumer Discretionary Select Sector SPDR (XLY), meanwhile, is up over 5% during the past month while trailing staples year-to-date.
The recent outperformance of discretionary continued through the first week of earnings season.
Some of the top consumer staples ETFs in recent trading, meanwhile, have been narrower in focus, such Invesco’s small-cap consumer staples ETF (PSCC) and the Invesco’s equal-weighted S&P 500 consumer staples portfolio (RSPS) which stands out from the market-weighted XLP.
Costco, Walmart and Procter & Gamble are the top three holdings in XLP, while Amazon, Tesla and Home Depot are the top three in XLY. Amazon is up nearly 10% in the past month, while both Costco and Walmart have declined.
Cruise lines, among the top holdings in discretionary funds, have also gained traction. Royal Caribbean Cruises, a top holding across multiple ETFs, has increased by over 27% just within the last month, recently reaching an all-time high. It’s been one of the biggest gainers in the market rebound this year, up over 50%.
Viking Holdings, Norwegian Cruise Line Holdings and Carnival Corporation have been on a similar bullish trajectory.
“We like Royal Caribbean because we see double digit growth this year. We like Norwegian because the stock is very cheap even though their gross is likely going to be less than RCL. We like Viking, that higher-end customer with leadership in river cruising,” said Laura Champine, Loop Capital senior consumer analyst on CNBC’s The Exchange last month. “All in all, I think this is a space to own.”
Sign up for our weekly newsletter that goes beyond the livestream, offering a closer look at the trends and figures shaping the ETF market.