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Four ways to play July’s top-performing sector, via two ETF analysts

Tech may be the star of the show this year, but one other group is not far behind.

The consumer discretionary sector was the S&P 500’s best-performing sector in July, climbing more than 7% for the month.

The five largest exchange-traded funds by assets in the space are also beating the market since the March bottom. While the S&P is up over 38% for that time frame,

For XLY, VCR and FDIS, Amazon has been a major driver. That stock, which is sitting near record highs, makes up about 24% of each portfolio.

E-commerce stocks continue to present opportunity in this group, said Jay Jacobs, senior vice president and head of research and strategy at Global X. His firm runs the Global X E-commerce ETF (EBIZ).

“This is one of the sectors that has been most upheaved by Covid-19,” Jacobs said Monday on CNBC’s “ETF Edge.” “Obviously, as people have stayed at home, they haven’t been able to go out and go shopping at some of these traditional brick-and-mortar stores.”

“Beyond that, you’ve seen massive changes in consumer habits. People are shopping online for things that they never bought online before, like groceries or even vehicles, and people are changing what they spend money on,” he said.

As people working from home begin to opt for things like athleisure over office wear, “we’re going to continue to see a lot of disruption in the space,” Jacobs said.

“We’ve seen 23 retail bankruptcies this year so far, and we’ve seen e-commerce names far outperform the brick-and-mortar names,” he said. “So, we’re very bullish on the subsector of internet retail.”

EBIZ’s top five holdings by weighting are Wayfair, Etsy, CoStar Group, Mercadolibre and Shopify.

Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA Research, flagged three other ways to play the group.

However, like in any sector, success largely “depends on what kind of ETF you’re buying,” he said in the same “ETF Edge” interview.

“You really want to make sure you look inside the portfolio, make sure you’re getting the diversification,” he said. He added that while FDIS has outperformed, Amazon makes up a 24% chunk of is portfolio.

Another option for investors could be the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD), which has “significantly lagged behind” its cohort and “has equal weighting in those L Brands, Whirlpool, PulteGroup names … as much as it has in Amazon,” Rosenbluth said.

“The downside is it also has roughly the same amount of exposure to Under Armour and Carnival, which is what’s weighing it down,” he said. RCD is down almost 16% year to date.

Investors can also narrow their focus and play catch-up with an ETF like the SPDR S&P Homebuilders ETF (XHB), Rosenbluth said.

“The homebuilders ETF … is a good way of playing some of those homebuilding companies as well as Whirlpool,” which recently retraced its 2018 highs, he said. “But, again, you’ve got to make sure you understand what’s inside the portfolio.”

The XLY traded slightly lower in Tuesday’s premarket trading.


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