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How to Track the Consumer With ETFs

If the American consumer is really carrying the weight of the world on his shoulders, it'd be good to know if he's getting ready to shrug.

So how can you keep a finger on the consumer's pulse? Well, one way is to watch consumer discretionary exchange-traded funds.

Each month the so-called strength of the American consumer is evaluated by various reports such as the Conference Board consumer confidence index. The latest reading showed that consumer confidence declined to 97.7 in April from 103 in March.

Another set of monthly economic releases, the University of Michigan consumer sentiment index, will be arriving on Friday.

But while these reports can dramatically move stocks on the day of their release, their infrequency reduces their effectiveness as market-based measures of the consumer's health.

One alternative is to follow the trading patterns of one of three very different consumer discretionary ETFs -- the Consumer Discretionary SPDR (XLY), the iShares Dow Jones U.S. Consumer Services (IYC) ETF and the Vanguard Consumer Discretionary Vipers (VCR).

The XLY is one of nine select sector SPDRs that combine to hold all the stocks in the S&P 500. The 87 consumer discretionary stocks contained in the XLY currently comprise just over 11% of the index. By comparison, financial stocks account for the heaviest weighting, with close to 20% of the index, followed by technology shares at just under 18%.

As one might expect from an ETF made up of companies that derive their profits from consumers' excess cash, the XLY has healthy weightings in retail, automobile, hotel and leisure, media and restaurant companies. Home Depot (HD) shares maintain the heaviest weighting in the ETF with 6.8% of assets, followed by cable giants Time Warner (TWX) and Comcast (CMCSA).

Oddly, the XLY does not hold shares of the nation's largest retailer, Wal-Mart (WMT), while it does hold rivals Target (TGT) and Lowe's (LOW). Instead, Wal-Mart can be found in the consumer staples category, where it makes up 15% of the heavily concentrated Consumer Staples SPDR (XLP).

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