US CPI Up 0.3% in February: Consumer Discretionary ETFs to Watch

U.S. consumer prices rose moderately in February, with the Consumer Price Index (CPI) rising 0.3% for the month, according to data released by the U.S. Labor Department. The reading, which left the annual inflation rate steady at 2.4%, suggests inflation remained contained before the surge in oil and gasoline prices (following the recent U.S.-Israeli conflict with Iran) began to weigh on consumer prices.

With inflation still above the Federal Reserve’s 2% target but potentially shifting amid the ongoing crisis in the Middle East, attention is turning to the consumer discretionary sector, including Amazon AMZN and The Home Depot HD, as well as the ETFs that hold them.

Before discussing the specifics of these ETFs, it is important to examine how recent economic data, along with geopolitical developments that are frequently shifting the narrative, may influence consumer spending and, in turn, the consumer discretionary sector. When prices rise, the key question is not just whether consumers can spend, but whether they will continue to prioritize non-essential purchases.

Decoding the Data: CPI, Retail Sales and Consumer Resilience

The connection between the latest CPI data and consumer spending, particularly for discretionary items, is crucial. The February inflation report showed that core inflation (excluding food and energy) remained contained, rising just 0.3% for the month. This stability in prices for many goods, outside of shelter and food, helped support consumer purchasing power.

This is reinforced by the CNBC/NRF Retail Monitor’s February data, released by the National Retail Federation (NRF) that showed another month of sales growth. Total retail sales rose 0.28% sequentially and witnessed a robust 6.24% increase year over year. Key discretionary categories performed well, with clothing and accessories stores surging 11.05% year over year, and general merchandise stores up 7.77%.

NRF president and CEO Matthew Shay attributed this growth to "continued wage gains and overall low unemployment levels," noting that this marked the fifth consecutive month of sales increases. This suggests that in February, steady employment and contained core inflation provided consumers with the confidence and means to spend on non-essential items.

Geopolitical Crosscurrents: What It Means for Discretionary ETFs

While the February inflation data showed consumer resilience in connection with discretionary item purchases, it largely predated the recent sharp escalation in the Middle East conflict.

Notably, oil has surged past $100 a barrel, while gasoline prices have jumped over 18% since the U.S.-Israel war with Iran started at the end of February (as per data from motorist advocacy group AAA cited in Reuters). This has undoubtedly introduced a new inflation risk.
Higher energy costs act as a tax on consumers, forcing households to potentially shift spending from discretionary items like new clothing, electronics, or dining out to pay for fuel and higher transportation-influenced costs on everyday goods.

Thus, while the resilient spending data last month provided a positive fundamental backdrop for consumer discretionary ETFs, the ongoing war situation in the Middle East can eat into the profits that drive these ETF valuations. The profitability of companies with extensive overseas manufacturing or shipping exposure is at stake right now.

Consumer Discretionary ETFs to Watch

Considering the aforementioned discussion, as the performance of consumer discretionary stocks is likely to hinge on whether this resilience can withstand the mounting pressure from higher energy prices in the months ahead, the following ETFs warrant a look from concerned investors:

State Street Consumer Discretionary Select Sector SPDR ETF XLY

This fund, with net assets worth $22.49 billion, offers exposure to 48 companies from the specialty retail; broadline retail; hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; automobile components; distributors; leisure products; and diversified consumer services industries. Its top three holdings include: AMZN (22.24%), Tesla (TSLA) (19.23%) and HD (6.09%).

XLY has rallied 16.5% over the past year, but slipped 2.3% since the end of February. It charges 8 basis points (bps) as fees. The fund traded at a good volume of 10.96 million shares in the last trading session.

Vanguard Consumer Discretionary Index Fund ETF Shares VCR

This fund, with net assets worth $6.1 billion, offers exposure to 285 U.S. companies within the consumer discretionary sector. Its top three holdings include: AMZN (23.02%), TSLA (17.06%) and HD (5.02%).

VCR has risen 18.5% over the past year, but slipped 2.6% since the end of February. It charges 9 bps as fees. The fund traded at a volume of 0.04 million shares in the last trading session.

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund, with net assets worth $1.76 billion, offers exposure to 251 consumer discretionary stocks. Its top three holdings include: AMZN (20.26%), TSLA (16.78%) and HD (5.54%).

FDIS has rallied 18.5% over the past year, but slipped 2.5% since the end of February. It charges 8 bps as fees. The fund traded at a volume of 0.07 million shares in the last trading session.

iShares Global Consumer Discretionary ETF RXI

This fund, with net assets worth $264 million, offers exposure to 133 companies that produce non-essential goods and services, including automobiles, apparel, and media. Its top three holdings include: AMZN (9.61%), TSLA (9.19%) and HD (4.76%).

RXI has risen 12.9% over the past year, but slumped 4.5% since the end of February. It charges 39 bps as fees. The fund traded at a volume of 0.01 million shares in the last trading session.

Boost Your Portfolio with Our Top ETF Insights

Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.

Don’t miss out on this valuable resource. It’s free!

Get it now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Amazon.com, Inc. (AMZN): Free Stock Analysis Report

The Home Depot, Inc. (HD): Free Stock Analysis Report

State Street Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

Vanguard Consumer Discretionary Index Fund ETF Shares (VCR): ETF Research Reports

Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports

iShares Global Consumer Discretionary ETF (RXI): ETF Research Reports

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research