Thursday, November 06, 2008

How to (Not) Play Declining Consumer Spending

My portfolio makes heavy use of ETF option strategies. I've considered ways to play the continuing weakness in consumer spending:

Retailers suffered through the weakest October in at least 39 years, despite frenzied price cutting as they desperately try to pull in consumers who are too worried about their finances to shop.

The problem is that the most widely traded ETFs covering retailers aren't good pure plays for short-term special situation investing.

SPDR S&P Retail (XRT): Holds Family Dollar (FDO) and Sears (SHLD), which aim for a thriftier clientele.
iShares Dow Jones U.S. Consumer Goods (IYK): Holds a lot of consumer staples like Coca-Cola (KO) and Colgate-Palmolive (CL).
iShares Dow Jones U.S. Consumer Services (IYC): Holds Wal Mart (WMT), which is doing okay given its position as a low price leader.

All in all, the choices for a retail ETF aren't as clear cut as for the Financial Select SPDR (XLF) I used earlier in the year for a bearish bet against Wall Street. Banks and brokerages were both hurt in the credit crunch, but the same can't be said for widely diverse discount retailers and specialty retailers. Buying a put or selling uncovered calls against retail ETFs is too risky, so I'm not playing it.

Thinking about situations like this leads me to conclude that many ETFs just shouldn't exist in the first place. Benchmarks like the S&P 500 and the Russell 2000 are useful because they are broad and not subject to large, frequent changes. ETFs that slice and dice markets into too-small segments, like consumer retail, are mere marketing gimmicks.

Nota bene: Anthony J. Alfidi does not hold any position in the consumer retail ETFs mentioned in this commentary.