VCR ETF: Consumer Discretionary Dashboard For December

This monthly article series shows a dashboard with aggregate subsector metrics in Consumer Discretionary. It is also a top-down analysis of sector ETFs like the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR), 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.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
Auto + Components	-42.59	-9.04	0.0491	0.8477	0.0143	14.45	23.62	0.0606	1.6192	0.0368	19.26	22.09	-4.15%	-27.37%
Durables + Apparel	-0.25	-4.87	0.0730	0.8240	0.0131	21.52	34.44	0.0518	0.7028	0.0319	18.44	46.83	7.57%	-16.77%
Retailing	-22.11	16.11	0.0495	0.6380	0.0240	34.17	34.53	0.0496	0.8744	0.0394	24.95	36.24	0.22%	-15.05%
Services	-11.59	21.28	0.0279	0.3824	0.0183	21.98	31.21	0.0331	0.4114	0.0208	14.19	35.57	-0.45%	-9.15%

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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

Value scores have improved in auto/components and retailing.

Momentum

The next chart plots momentum data.

Interpretation

Durables and apparel are close to their baseline in value and quality, based on 11-year averages. Consumer services and retailing are moderately overvalued, by about 12% and 22%, respectively. It may be partly justified for both of them by good quality scores. Consumer services, which include hotels, restaurants, leisure and diversified services, have the highest quality score. The most overvalued subsector is auto and components. Moreover, its quality is below the historical baseline.

Focus on VCR

The Vanguard Consumer Discretionary ETF has been tracking the MSCI US IMI Consumer Discretionary 25/50 Index since 01/26/2004. It has 315 holdings and a total expense ratio of 0.10%, which is the same as XLY. It is also available as a mutual fund (VCDAX).

The next table shows the top 10 holdings with basic ratios and dividend yields. Their aggregate weight is 59%, with about 32% in the top 2 names. Amazon (AMZN) and Tesla (TSLA) respectively represent 20.33% and 11.91% of the fund’s asset value.

Ticker	Name	Weight	EPS ttm growth%	P/E ttm	P/E fwd	Yield%
AMZN	Amazon.com, Inc.	20.33%	-57.41	84.10	N/A	0
TSLA	Tesla, Inc.	11.91%	214.34	48.45	38.47	0
HD	The Home Depot, Inc.	7.62%	10.97	20.09	19.99	2.28
MCD	McDonald’s Corp.	4.61%	-18.06	34.58	27.60	2.21
NKE	NIKE, Inc.	3.18%	-6.48	31.65	37.47	1.22
LOW	Lowe’s Cos., Inc.	3.03%	-11.41	20.79	15.42	1.98
SBUX	Starbucks Corp.	2.69%	-19.98	36.07	29.92	2.07
TJX	The TJX Cos., Inc.	2.13%	31.01	27.65	25.45	1.49
BKNG	Booking Holdings, Inc.	1.90%	564.81	32.95	20.73	0
TGT	Target Corp.	1.77%	-46.24	20.88	27.22	2.83

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Ratios by Portfolio123

VCR has outperformed XLY by a short margin of 43 bps in annualized return since inception. Risk-adjusted performances (Sharpe ratio) are identical.

	Total Return	Annual. Return	Drawdown	Sharpe	Volatility
VCR	506.10%	10.02%	-61.45%	0.52	19.60%
XLY	462.91%	9.59%	-59.05%	0.52	18.74%

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Data calculated with Portfolio123

In summary, VCR is a good product with cheap management fees for investors seeking capital-weighted exposure in consumer cyclicals. It currently holds 315 stocks including large, mid and small caps, whereas XLY has only 56 holdings in large companies. However, it doesn’t make a significant difference in performance between the two funds since 2004. VCR looks a good choice for long-term investors, but XLY is a better instrument for tactical allocation and trading, thanks to higher trading volumes. Investors must be aware that over 30% of VCR asset value is in two stocks (AMZN and TSLA). If it is a concern, a better choice is 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 0.0495 (or price/earnings below 20.20) 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.

GDEN	Golden Entertainment, Inc.
PLAY	Dave & Buster’s Entertainment, Inc.
CHS	Chico’s FAS, Inc.
PATK	Patrick Industries, Inc.
AN	AutoNation, Inc.
MUSA	Murphy USA, Inc.
WSM	Williams-Sonoma, Inc.
PLCE	The Children’s Place, Inc.
M	Macy’s, Inc.
JWN	Nordstrom, Inc.

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