"Extremely bleak expectations for consumer goods and services have made for a compelling risk-to-reward profile at First Trust Consumer Discretionary AlphaDex ETF (NYSE: FXD)," says Nathan Slaughter.
In The ETF Authority he suggests, "But at some point consumers will come back from hiding, and now is an opportune time for value investors to pounce."
"FXD tracks a quantitative, rules-based index that relies on fundamental factors such as sales growth and return on assets to rank candidates contained within the larger Russell 1000 universe.
"Unlike some funds that hone in on a specific niche (like retailers), FXD offers exposure to all types of consumer-oriented industries, from casual dining to lodging to cruise lines.
"The 130-stock portfolio is filled with familiar names, many of which you might patronize on a regular basis. The list includes Barnes & Noble, Expedia, Best Buy, Amazon, GameStop, Home Depot and Disney.
The fund's proprietary ranking system is designed to identify and overweight the most promising stocks in a given sector.
"And in this case, that has led to large stakes in for-profit educators -- Apollo Group, DeVry, Strayer Education -- have thrived as displaced workers look to strengthen their resume with marketable skills.
"You'll also find deep discounters are well-represented in the portfolio. Budget-conscious shoppers looking to stretch their dollars have flocked to inexpensive outlets like Family Dollar and the stock has been a true standout. All four of these top holdings are already showing healthy gains so far in 2009.
"In this difficult environment, most shoppers are reining in their spending and sticking to things they need rather than things they want. But I consider this cyclical downturn the result of temporary macroeconomic conditions rather than a permanent behavioral shift among U.S. shoppers.
"Consider the last time the economy fell into recession in March 2001. Just like the current slump, industrial output had plunged, layoffs were coming in bunches and consumer spending flat-lined.
"But as soon as the economy recovered, stocks in this group came roaring back -- delivering huge gains for those who had the courage to invest while the sector was still out of favor. This particular downturn is much deeper and protracted, but in time I think we could see a similar situation unfold.
"Given the dismal economic backdrop and abysmal consumer sentiment readings, it takes a leap of faith to invest in this particular sector right now.
"But at some point they will come back from hiding, with a hearty appetite for boating, traveling, shopping and other leisure pursuits. With all this in mind, I am adding FXD to my 'Sector Trading' portfolio."
