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Consumers on a Shopping Spree … Five ETFs to Help You Profit

Companies / Exchange Traded Funds Dec 16, 2010 - 07:32 AM GMT

By: Ron_Rowland


Best Financial Markets Analysis ArticleIf you’re like most Americans, you know December as the “Season of Shopping.” So today I’ll give you some ideas on how you can make money to replace what you’ll spend this month.

Consumers lost some of their enthusiasm when the economy went south in 2008. But this year the madness is back!

Retailers are reporting nice sales growth. I’ve noticed surprisingly big crowds at the stores in my part of the country — and they aren’t just browsing. Plenty of people walk out with bags in hand.

Stock market analysts divide consumer spending into two broad categories: Consumer staples and consumer discretionary.

Consumer Staples companies make and sell the basic products people buy first, such as food, medicines and toilet paper. For anyone with babies, diapers are a necessity. Likewise are cigarettes, for those who smoke. The common theme is that we have little choice about staples.

Consumer Discretionary includes items we buy when we have extra money to spend. Examples include designer clothing, jewelry, electronics, luxury cars and artwork. You can live without this stuff if you must.

There is obviously some overlap in the categories. For instance, Walgreen’s (WAG) is considered a staples stock, but their stores sell many non-essential items.

The broader point is that consumer staples is a defensive sector that can outperform in a weak economy. Whereas consumer discretionary is a cyclical sector that tends to do better when consumers feel more confident.

I’m skeptical about the economic recovery. Yet consumers still seem to be opening up their wallets this month. Here are five ideas using exchange traded funds (ETFs) that can help you get on the other side of the sales counter …

For many consumers, home remodeling is a big part of their discretionary spending.
For many consumers, home remodeling is a big part of their discretionary spending.

ETF Idea # 1 — SPDR Consumer Discretionary (XLY)

This ETF holds the “blue chip” consumer discretionary names. In fact, it includes every stock from this sector that is a member of the S&P 500 Index …

That covers big companies like McDonald’s (MCD), Starbucks (SBUX), Ford Motor (F), Home Depot (HD), and Target (TGT). This ETF is huge, very liquid, and a good all-purpose pick for anyone who wants consumer discretionary exposure.

ETF Idea # 2 — PowerShares Dynamic Media (PBS)

You may find the thought of “consuming” media to be a little odd at first — but that’s what you do when you pay the TV bill each month. Time Warner (TWX), Comcast (CMCSA), and DirecTV (DTV) are three of the top holdings in this ETF from PowerShares.

Plus PBS owns shares in another company you’ve probably heard about: Google (GOOG). Google may seem like more of a technology company. But with most of the revenue coming from advertisement sales, GOOG is a media story, too.

Spending doesn't get more discretionary than casinos and resorts.
Spending doesn’t get more discretionary than casinos and resorts.

ETF Idea # 3 — Market Vectors Gaming (BJK)

Gambling is a classic cyclical sector. When more people can afford to ante up, the casinos are busier. And a busy casino is usually a profitable casino — at least for the house.

BJK has a stake in all the major casino owners: Las Vegas Sands (LVS), Wynn Resorts (WYNN), MGM Mirage (MGM), and many smaller players. It also owns shares of some foreign gaming behemoths that are hard for Americans to buy … companies like Genting, Sands China, and TABCORP, along with industry suppliers such as International Game Technology (IGT).

ETF Idea # 4 — Global X China Consumer (CHIQ)

An emerging middle class in China is producing a new wave of discretionary spenders.
An emerging middle class in China is producing a new wave of discretionary spenders.

National statistics show that China is still, on average, much poorer than the Western nations. But there is also a growing urban class of educated young people with disposable income. These “chuppies,” a term coined by my friend Asian stock specialist Tony Sagami, are quickly catching up with their Western peers. And China is so big that even a small minority represents millions of people.

CHIQ gives you a simple way to get in on China’s consumer action, with stocks like New Oriental Education, Want Want China, Air China, and DongFeng Motors.

ETF Idea # 5 — iShares Dow Jones U.S. Home Construction (ITB)

After facing a near-death experience the last few years, luxury home builders are trying to come back to life. ITB owns most of the familiar names from this sub-sector: Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), and Pulte Group (PHM).

The ETF also has allocations in companies that serve the home builders, like Sherwin-Williams (SHW) and Owens Corning (OC). If you think the housing sector will pick up, ITB is a great way to play the trend.

Nevertheless, I view ITB as much riskier than the others …

That’s because the first four I outlined have the potential to benefit from short-term trends like holiday shopping. Buying a home, however, is a different story since it requires a much larger and much longer commitment by consumers.

And even though consumers might be willing to spend on gifts, home furnishings, and remodeling, I think it will take more time before new housing construction turns around.

One last thing: As I said above, the consumer discretionary sector is cyclical. Cycles go both ways. Therefore, as attractive as these ETFs may look right now, they can turn around in a heartbeat if the economy sours.

In other words, they aren’t buy-and-forget investments … you need to stay on top of them.

Best wishes,


P.S. For details on getting specific buy and sell instructions on harnessing the world’s most profitable stock markets, exclusively with ETFs, be sure to watch my special new presentation … completely free of charge!

Just turn up your computer’s speakers and click here to view it now.

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