Fidelity MSCI Consumer ETF: Consumer Discretionary Dashboard For January (NYSEARCA:FDIS)

This monthly article series shows a dashboard with aggregate subsector metrics in Consumer Discretionary. It is also a top-down analysis of sector exchange-traded funds (“ETFs”) like the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Fidelity MSCI Consumer Discretionary Index ETF (NYSEARCA:FDIS), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each subsector: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non-available when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for retailing in the table below is the 11-year average of the median Earnings Yield in retail companies.

The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios ((EY, SY, FY)) and their baselines (EYh, SYh, FYh). The same way, the Quality Score (“QS”) is the average difference between the two quality ratios ((ROE, GM)) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance. A floor of -100 is set for VS and QS when the calculation goes below this value. It may happen when metrics in a subsector are very bad.

Current Data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data named and defined above.

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Value and Quality Chart

The next chart plots the Value and Quality Scores by subsector (higher is better).

Evolution Since Last Month

The value score has deteriorated in durables and apparel, and to a lesser extent in consumer services.

Momentum

The next chart plots momentum data.

Interpretation

Subsectors are overvalued by about 12% to 43% relative to 11-year averages. It may be partly justified by a good quality score for consumer services, and to a lesser extent for retailing. Services include hotels, restaurants, leisure and diversified services. Durables and apparel are the less overvalued industry, but its quality score is slightly below the baseline. The less attractive subsector is auto and components.

FDIS Fast Facts

The Fidelity MSCI Consumer Discretionary Index ETF has been tracking the MSCI USA IMI Consumer Discretionary 25/50 Index since 10/21/2013. It has a total expense ratio of 0.08%, which is lower than XLY (0.10%).

The fund has 313 holdings as of writing. The next table shows the top 10 names with some fundamental ratios. Their aggregate weight is 58% of the fund’s asset value, with over 36% in the top 3 companies. Amazon alone represents almost 20% of the portfolio.

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Ratios: Portfolio123.

Fidelity MSCI Consumer Discretionary Index ETF has beaten XLY by 19 percentage points since inception. However, the difference in annualized return is only 91 bps. Risks measured in drawdown and volatility are similar in both funds.

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Data calculated with Portfolio123.

In summary, Fidelity MSCI Consumer Discretionary Index ETF is a good product with cheap management fees for investors seeking capital-weighted exposure in consumer cyclicals. FDIS holds 300+ stocks including large, mid- and small caps, whereas XLY has only 58 holdings in large companies. It has outperformed XLY by a short margin since 2013.

FDIS is a good choice for long-term investors, but XLY liquidity makes it a better instrument for tactical allocation and trading. Investors who are concerned by the weights of the top holdings, especially Amazon, may prefer the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD).

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a retail company with an Earnings Yield above 0.0489 (or price/earnings below 20.45) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

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It is a rotational list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.