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Ides of Friday for Discretionary ETFs?


There is no end to the stream of bad news for discretionary stocks and ETFs.


The final June reading of the University of Michigan Consumer Sentiment Index is out, and at 73.2, it's below the consensus estimate of 74.4 and the lowest tally of 2012.

Potentially making matters worse for discretionary stocks and ETFs is Thursday's spate of bad after-hours news. Shares of Ford (F), the second-largest US car maker, fell almost 3% in Thursday's after-hours session after the company said in an SEC filing that its second-quarter pretax loss for operations in Asia, Europe, and South America could reach $570 million.

That is nearly triple Ford's first-quarter pretax loss in those regions. Ford's international woes serve as one reminder that US companies are far from insulated from a slowing global economy.

The other reminder came courtesy of Nike (NKE), the world's largest maker of athletic footwear, post its first decline in quarterly profits since 2009. Shares of Nike plunged 12.5% in Thursday's after-hours session. Nike said it has too much inventory in China. Nike's Asia-Pacific problems could imply the same for other discretionary names with heavy exposure to the region.

That is potentially toxic news for the Consumer Discretionary Select Sector SPDR (XLY). With $3.2 billion in assets under management, XLY is the largest discretionary ETF. Ford and Nike combine for over 5% of XLY's weight, but the ETF is loaded with other companies that are increasingly dependent on China for sizable portions of revenue.

Starbucks (SBUX) and Yum Brands (YUM) combine for another 5.2% of XLY's weight. Those are two stocks US investors have used as ways of tapping into the Chinese economy. It cannot be forgotten that McDonald's (MCD), the world's largest fast-food chain, is XLY's top holding at almost 7% of the fund.

Nike's poor effort in the earnings confessional and the company's China issues could also prove problematic for another ETF: The SPDR S&P Retail ETF (XRT). Nike is not one of the $617.6 million fund's 98 holdings. Dick's Sporting Goods (DKS), Finish Line (FINL), and Foot Locker (FL) are. Those are major sellers of Nike products, and they account for over 3% of XRT's weight.

Beyond the Nike problem, XRT has a slight China conundrum of its own. Like XLY, XRT features a small allocation to Tiffany (TIF). The Asia-Pacific region is critical for Tiffany, and the company already had to pare earnings estimates earlier this year. Further weakness in China could create more problems for the company behind the little blue box.

Another ETF that could be hampered by the slowing global economy is the First Trust Consumer Discretionary AlphaDEX Fund (FXD). FXD is not excessively to one or two stocks. Comcast (CMCSA) is the fund's largest holding with a weight of just 1.5%.

Under normal circumstances, an ETF that spreads its weight around its lineup the way FXD does implies investors are protected from stock-specific risk. Dick's, Ford, Starbucks, Yum, Nike, and Foot Locker all make a home in FXD.

FXD is home to other major discretionary plays that could be hit on the China news as well, including GM (GM), Las Vegas Sands (LVS), and Coach (COH). Traders have already hit FXD, sending the ETF down almost 12.6% in the past three months, a performance that is more than 800 basis points worse than XLY's.

Editor's Note: This content was originally published on by The ETF Professor.

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