Ides of Friday for Discretionary ETFs?
The final June reading of the University of Michigan Consumer Sentiment Index is due out this morning and even if it meets the consensus estimate of 74.4, that would be the lowest tally of 2012. The June number would also be about five points below the May reading.
Potentially making matters worse for discretionary stocks and ETFs is Thursday's spate of bad after-hours news. Shares of Ford (NYSE: F), the second-largest U.S. car maker, fell almost three percent in Thursday's after-hours session after the company said in an SEC filing that's second-quarter loss pretax loss for operations in Asia, Europe and South America could reach $570 million.
That is nearly triple Ford's first-quarter pre-tax loss in those regions. Ford's international woes serve as one reminder that U.S. companies are far from insulated from a slowing global economy.
The other reminder came courtesy of Nike (NYSE: NKE), the world's largest maker of athletic footwear, post its first decline in quarterly profits since 2009. Shares of Nike plunged 12.5 percent in Thursday's after-hours session. Nike said it has too much inventory in China. Nike's Asia-Pacific problems could imply the same for other discretionary names with heavy exposure to the region.
That is potentially toxic news for the Consumer Discretionary Select Sector SPDR (NYSE: XLY). With $3.2 billion in assets under management, XLY is the largest discretionary ETF. Ford and Nike combine for over five percent of XLY's weight, but the ETF is loaded with other companies that are increasingly dependent on China for sizable portions of revenue.
Starbucks (NASDAQ: SBUX) and Yum Brands (NYSE: YUM) combine for another 5.2 percent of XLY's weight. Those are two stocks U.S. investors have used as ways of tapping into Chinese economic. It cannot be forgotten that McDonald's (NYSE: MCD), the world's largest fast-food chain, is XLY's top holding at almost seven percent of the fund's.
Nike's poor effort in the earnings confessional and the company's China issues could also prove problematic for another ETF: The SPDR S&P Retail ETF (NYSE: XRT). Nike is not one of the $617.6 million fund's 98 holdings. Dick's Sporting Goods (NYSE: DKS), Finish Line (NASDAQ: FINL) and Foot Locker (NYSE: FL) are. Those are major sellers of Nike products and they account for over three percent of XRT's weight.
Beyond the Nike problem, XRT has a slight China conundrum of its own. Like XLY, XRT features a small allocation to Tiffany (NYSE: TIF). The Asia-Pacific region is critical for Tiffany and the company already had to pare earnings estimates earlier this year. Further weakness in China could be create more problems the company behind the little blue box.
Another ETF that could be hampered by the slowing global economy is the First Trust Consumer Discretionary AlphaDEX Fund (NYSE: FXD). FXD is not excessively to one or two stocks. Comcast (NASDAQ: CMCSA) is the fund's largest holding with a weight of just 1.5 percent.
Under normal circumstances, an ETF that spreads its weight around its lineup the way FXD implies investors are protected from stock-specific risk. Dicks, Ford, Starbucks, Yum, Nike and Foot Locker all make a home in FXD.
FXD is home to other major discretionary plays that could be hit on the China news as well, including GM (NYSE: GM), Las Vegas Sands (NYSE: LVS) and Coach (NYSE: COH). Traders have already hit FXD, sending the ETF down almost 12.6 percent in the past three months, a performance that is more than 800 basis points worse than XLY's. For more on sectors ETFs, click here.
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