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ETF Specialist

Think Consumers Can Get Off the Mat?

This ETF gives exposure to investors looking to bet that discretionary spending can make a comeback.

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Retailing is a notoriously competitive industry characterized by low barriers to entry and essentially nonexistent customer-switching costs. For instance, fashion apparel retailers like Wet Seal (WTSLA) tend to rely on trend-spotting to make key merchandising decisions during a handful of crucial seasons, like back-to-school and the holidays. Buffeted by bruising competition and fickle consumer tastes, retailers typically struggle to trench out durable competitive advantages, with only the largest ( Wal-Mart (WMT),  Home Depot (HD)) or best entrenched ( Amazon (AMZN)) achieving dominance.

In our view, the U.S. consumer and the financials sector are theoretically in the same position in terms of the deleveraging process that must take place. While the unwinding of leverage at banks threatens lower returns on equity for those businesses, the unwinding of the consumers' debt-laden balance sheet could result in a period of contracting consumer spending. While energy and food price inflation, which previously choked consumers' disposable income budgets, has retreated from recent highs, we still see a number of challenges ahead. The U.S. consumer appears tapped out thanks to lower asset prices (namely, housing and stocks), weak labor markets, stricter access to credit, and debt deleveraging.

John Gabriel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.