Now may be an opportune time to consider adding a consumer cyclical stock fund or ETF to your portfolio. Although last Friday’s wage and labor data came in weaker than expected, the big picture view on the U.S. economy still supports a compelling case for consumer spending in the coming quarters.

consumer-staple-stocksOne economic report does not constitute a pattern and it does not take away the fact that 12 consecutive months of 200,000-plus new jobs aided the economy and the current 5.5% unemployment rate. The average payroll gain for the past year is still at 197,000, which is a healthy number.

Also, although the mining industry saw big losses, most industries saw gains in hiring in March, and the wage growth part of that same report was better than expected.

Further supporting the case for healthy consumer spending in coming quarters is low gas prices, which could finally begin translating into extra cash in the pockets of consumers. And the slight pause in labor means the Fed can also extend its easy money policy, which is good for corporations and consumers.

Therefore, there is still a compelling case for consumer cyclical stocks now. With that I give you, in no particular order, three of the best consumer cyclical stock funds to buy now.

  1. Fidelity Select Retailing Portfolio (FSRPX) is an outstanding actively-managed mutual fund that provides a solid mix of large-cap and mid-cap consumer cyclical stocks, consisting of U.S. companies, with a small portion allocated to foreign companies. Top holdings include Home Depot (NYSE: HD) and The Priceline Group (NASDAQ: PCLN). Although the lead fund manager, Deena Friedman, has been at the helm of FSRPX for less than one year, it’s no industry secret that Fidelity’s management strength derives from the depth and experience of its analyst teams, which are the driving force behind its top-performing funds, like this one. The fund’s inception year is 1985, making it one of the oldest mutual funds specializing in consumer cyclical stocks. Performance ranks for the 1-, 3-, 5-, 10- and 15-year annualized returns are better than at least 95% of other consumer cyclical funds. Adding to the attraction of FSRPX is the low expense ratio of 0.82%.
  2. Vanguard Consumer Discretionary ETF (NYSEArca: VCR) offers investors a broad selection of stocks that provide exposure to firms directly related to discretionary consumer spending, especially in the United States. This passively-managed ETF holds 380 consumer stocks across a variety of retailers, restaurants, automakers, entertainment and media companies, and travel and leisure firms, among others. Top holdings include The Walt Disney Company (NYSE: DIS) and Amazon (NASDAQ: AMZN). Typical of an index fund, VCR won’t likely find itself among the top performers in its category for any given year, but its five-year annualized return of 19.6% places it in the top 1% among its consumer cyclical category peers. It’s also tough to beat the rock bottom expense ratio of 0.12%.
  3. Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY) offers investors concentrated exposure to firms in the S&P 500 index that are in the consumer cyclical sector. XLY is one of the largest highly-traded ETFs in the consumer cyclical category, with $11.2 billion in assets. This liquidity and size is an attractive feature for an ETF, as opposed to thinly-traded ETFs that can be disadvantageous to investors because of swings in the bid/ask spread on trading price. XLY holds 85 consumer cyclical stocks, 99% of which are U.S. companies. The expense ratio is low, at 0.15%.

Sector funds, such as one of these in the consumer cyclical sector, can be added to a portfolio as a smart tactical satellite holding to complement a diversified portfolio. Although economic and market conditions may favor this sector now and in the coming quarters, short-term timing strategies are not the best use of these funds.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities, although his firm holds positions in XLY for some client accounts.

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