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).

The XLY is the most concentrated of the trio of consumer discretionary ETFs, with 47% of its assets in its top 10 names. The expense ratio for the ETF is 0.28%. The XLY is down 11.1% this year, 6.5 percentage points behind the S&P.

The IYC is a bit more watered down at the top, holding 35% of its assets in a top 10 that has Wal-Mart in the No. 1 spot at 7.6%. The greater dilution should be expected, since the IYC holds 256 stocks. That greater diversification comes at a cost, though, as the expense ratio for the IYC is 0.60%.

The IYC is down 8.4% this year, the least of the three ETFs. That's also a somewhat surprising figure, considering that Wal-Mart shares -- often considered to be a consumer confidence indicator on their own -- have fallen over 11% year to date.

The VCR, Vanguard's entry, holds the most stocks, with 434. It is also the least concentrated, with only 31% of assets in its top 10 names. Like S&P's XLY, Vanguard shifts Wal-Mart into the consumer staples arena. The VCR, which was introduced last year, also matches the XLY's expense ratio of 0.28%. The VCR is down 9.35% for the year.

The fact that all three consumer discretionary ETFs are significantly trailing the S&P 500 could be considered a sign that in the eyes of investors, the consumer might not be feeling too good.

Another market-based signal that the consumer is growing shakier as the year progresses can be found by looking at the rising short interest for the XLY, the most heavily traded of the three ETFs, on the Amex. Short interest in the XLY jumped from 3.16 million shares in December 2004, with 5.4 days to cover, to 4.7 million shares short and 12.7 days to cover in March 2005. In April, the short interest stayed at 4.7 million, but the higher daily volume reduced the days to cover to 7.8.

According to the American Stock Exchange, short interest in the XLY represented 45% of total shares outstanding as of mid-April, and the IYC had 10.2% of its shares held short. Meanwhile, short interest for individual U.S. stocks averages around 2%.

A short sale is a market transaction in which an investor sells borrowed securities in anticipation of a price decline. Selling short is the opposite of going long. That is, short-sellers make money if the stock goes down in price.

"There is a link between consumer confidence and the underperformance of consumer discretionary ETFs," says Kevin Ireland, vice president at the American Stock Exchange. Ireland adds that even with high levels of short interest in the XLY and IYC, however, the likelihood of a short squeeze is not too great since "most of the squeezing will be done in the underlying stocks, not the ETFs."

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