If the economic recovery effort can be thought of as a relay race, the governments of the world are nearing the end of their leg. After propping up the economy with massive stimulus programs and unprecedented injections of liquidity into global financial markets, cash-strapped government leaders are now looking to pass the baton to consumers, hoping that a surge in private spending will somehow materialize without a prior downswing in unemployment and lend staying power to the recovery. What remains to be seen is whether the hand-off will be a clean one, or if the baton will clank along the ground. 

By many indications, the outlook is dim. Consumer confidence recently fell for the first time in three months on fears of a jobless recovery. "Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence," said Lynn Franco, Director of the Conference Board Consumer Research Center. The Reuters/University of Michigan Consumer Sentiment Index recently plummeted as well, with income and job prospects also to blame for the plunge. The Federal Reserve acknowledged the weakness in the recovery, suggesting that additional stimulus measures may be needed if conditions worsen further.

The key to turning those depressing figures around may lie in the rich, wealthy households that account for an outsize portion of private spending. According to Federal Reserve data, the top 5% of income earners -- households with annual income of $210,000 or more -- account for one third of consumer outlays. While the lower end of the wage spectrum has seen its purchasing power decimated by surging unemployment, many wealthy consumers have continued to spend lavishly [see ETF Plays For A Retail Recovery].

There is vast disparity in unemployment rates between those holding a Doctoral degree (2.5%) and those who have completed less than a high school diploma (14.6%). With a median weekly income of $1,532, doctoral degree-carrying individuals have less risk of becoming jobless and a higher disposable income to spend on luxury goods. After briefly tightening their purse-strings during the depth of the recession, spending accelerated rapidly during the recovery. In May, households earning $90,000 or more annually were spending $145 per day, up 33% from the same period a year earlier [see Beyond XLY: Three Pure Play Consumer Discretionary ETFs].

Ticker ETF YTD Return
ROB Global Luxury Index Fund 6.0%
PEJ Leisure and Entertainment Portfolio 6.5%
XLY Consumer Discretionary SPDR 1.2%
SPY S&P 500 SPDR -3.8%

A look at the ETFs in the Consumer Discretionary ETFdb Category reveals some interesting trends; the top performers to date in 2010 are funds that cover the high end of the spending spectrum; the Claymore/Robb Report Global Luxury ETF (NYSE: ROB) is up about 5%, while the PowerShares Dynamic Leisure & Entertainment Portfolio (NYSE: PEJ) has gained close to 7%. By comparison, the S&P 500 SPDR (NYSE: SPY) has lost nearly 5% and the broad Consumer Discretionary SPDR (NYSE: XLY) has gained just 1.2% on the year. While the general population may be strapped for cash, the millionaires of the world have gone on a spree that has given certain discretionary funds a boost [see Looking For Consumers? ETFs To Play Millionaire-Heavy Countries]:

  • The Claymore/Robb Report Global Luxury ETF (ROB) tracks the performance of the Robb Report Global Luxury Index, a benchmark composed of about 32 holdings that include retailers, manufacturers, travel and leisure firms, and investment firms that produce luxury goods and services. ROB takes luxury to the extreme with holdings of highly exclusive companies that produce goods and services that a typical family budget could not afford. The fund's top holdings include: Wynn Resorts (Nasdaq: WYNN) (4.64%), Coach (4.54%), Christian Dior (4.50%), and Louis Vuitton (4.49%). ROB charges an expense ratio of 0.70% [also see Five ETFs For A Tumbling Euro].
  • The PowerShares Dynamic Leisure and Entertainment Intellidex Portfolio (PEJ) tracks the Dynamic Leisure and Entertainment Intellidex Index, an "intelligent" benchmark that is comprised of U.S. stocks of leisure and entertainment companies. The top holdings include Marriott (NYSE: MAR) (5.81%), Walt Disney Company (5.05%), and Starbucks (4.86%). This fund seems to provide exposure to middle class consumer spending with holdings in common domestic companies as well as good exposure to small cap securities which make up close to 40% of the fund's portfolio. PEJ changes an expense ratio of 0.60%.

End of the Road?
There are some indications that the upper class-fueled rally may be fading. Upper-income consumer spending plummeted in June from its May highs, falling to about $119 per day. Overall retail sales in June fell from May, with high end stores reporting some of the steepest drops. Expect ROB and PEJ to continue to trade as leveraged plays on the recovery in the second half of 2010; if consumer spending returns, these funds could enjoy a run higher. But if confidence remains under attack, expect these "pure play" consumer discretionary ETFs to suffer a beating.

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