Skip to main content

ProShares ETFs - is Consumer Goods a better bet than Consumer Services?

Consumer discretionary stocks have been in the news lately. As oil prices moderated and the U.S. dollar appreciated, the stocks shot upward. The consumer discretionary ETFs, naturally, followed suit.

There are a number of fund companies that offer ETFs focused on the consumer discretionary sector. They include:
  • Consumer Discretionary Select Sector SPDR (XLY) - large-cap blend with 83 stock holdings
  • PowerShares Dynamic Consumer Discretionary (PEZ) - mid-cap blend with 60 stock holdings
  • Vanguard Consumer Discretionary VIPERS (VCR) - large-cap blend with 411 stock holdings
In looking at the ProShares family of ETFs we see that there are two long ETFs in this category:
  • Ultra Consumer Goods (UGE) - large-cap blend, 147 holdings
  • Ultra Consumer Services (UCC) - large-cap blend, 226 holdings
ProShares also has a pair of corresponding Ultra Short ETFs:
  • UltraShort Consumer Goods (SZK) - large-cap blend, 147 holdings
  • UltraShort Consumer Services (SCC) - large-cap blend, 226 holdings
So it seems there is quite a bit of variety among the ETFs in this sector in terms of number of ETFs available and the number of holdings in each ETF. ProShares, however, is the only fund company that splits the consumer discretionary sector into two parts and has created separate ETFs for each.

Focus on the ProShares ETFs --

Since the stock market peak in the fall of 2007 UGE has performed better than UCC. You can see UGE in red in the chart below and UCC in blue. What might account for that difference?

Chart of UCC and UGE
The Consumer Services ETF (UCC) includes all kinds of retailers as well as cable companies, media companies, restaurants, airlines, advertising companies, hotels and casinos. As we know, airlines have been hammered by high fuel prices. Retailers have suffered as the real estate crisis has depressed consumer sentiment and gas prices lightened consumer wallets. High gas prices have also encouraged consumers to drive less. Less traveling has, of course, negatively impacted the hotels and casinos. All in all, this ETF has a great deal of vulnerability to a slowing economy and the process of inflation eating away at disposable income.

The Consumer Goods ETF (UGE) includes the companies that actually produce the products sold at the retailers that are part of the holdings of UCC. Thus, there is a certain linkage between the two ETFs. Dragging down the performance of UGE lately are U.S. auto makers and a selection of homebuilders. The problems in these two sectors are serious and well known. There are also a number of companies that might also be found in a Consumer Staples ETF and it appears that these stocks have been helping to prop up the ETF.

So both ETFs include stocks that are in sectors that are under extreme pressure. The difference between the two seems to be related to exports. The Consumer Goods companies that actually manufacture products have the potential to sell those products worldwide. With many of the services companies, they derive the majority of their revenue from customers in the U.S.

Conversely, with the U.S. leading the global economy downward, it makes sense that Consumer Services would be the worse performer.

Conclusion --

ProShares allows investors to more finely tune their approach to the Consumer Discretionary sector. When inflation is falling, the economy strengthening, real wages increasing and consumer sentiment improving the Consumer Services ETF (UCC) would probably outperform. In an economy as we see it today with dismal consumer sentiment, rising prices reducing consumer spending power and better growth taking place in developing countries, the Consumer Goods ETF (UGE) will at least do better than Consumer Services.

Both ETFs rallied lately but seem to have failed to get through their downward trending 200-day moving averages. With the U.S. economy in a questionable state and foreign economies showing signs of slowing, it is conceivable this recent rally is at an end. I suspect investors would do better at this point by buying either of the two ultra short ETFs.

Disclosure: none

Comments

Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation ...

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here:   https://tradingstockalerts.com/software/downloadpatch Contact us if you have questions or identify any new issues.

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...