Despite a weak start, the holiday season gained a firmer footing. This is especially true given the modest retail sales data for November and an improved consumer sentiment data for December.

After months of sluggish spending, retail sales rose a modest 0.2% in November, representing the largest increase since July. Meanwhile, consumer confidence improved for the third consecutive month in December, with the preliminary University of Michigan sentiment index reading 91.8, up from 91.3 in November (read: 5 ETFs for Loads of Holiday Shopping Delight).

Solid job additions, slowly rising wages and cheap fuel are providing consumers extra money to spend on a wide range of products including electronics and appliances, clothing, sporting goods and books, and at restaurants and bars. In particular, spending increased 0.8% on clothing, 0.6% on electronics and appliances, and 0.8% at sporting goods and hobby stores.

The strong trend is likely to continue for the rest of the holiday shopping season given an improving U.S. economy, a recovering housing market and stepped-up service activities. The National Retail Federation (NRF) expects total holiday sales in November and December (excluding autos, gas and restaurant) to grow at a solid pace of 3.7%. Though this marks a deceleration from last year’s growth rate of 4.1%, it is well above the 10-year average of 2.5%.

Investors should note that online sales have superseded brick-and-mortar retail sales this year with mobile shopping playing a crucial role. Online sales are projected to grow 6–8% to $105 billion. ComScore expects online sales to jump 14% year over year to $70.06 billion for the full holiday season (November and December), outpacing the growth of brick-and-mortar retail sales.

Given the holiday cheer, investors should cycle into the consumer discretionary space in order to obtain a nice momentum play. While looking at individual companies is certainly an option, a focus on the top-ranked consumer discretionary ETFs could be a less risky way to tap into the same broad trends (see: all the Consumer Discretionary ETFs here).
 
Top Ranked Consumer Discretionary ETF in Focus
 
We have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ rating in this space and are thus expected to outperform in the months to come (see: all the Top Ranked ETFs).

While all the top-ranked ETFs are likely to outperform, the following four funds could be good choices. These funds have enjoyed a strong momentum and have potentially superior weighting methodologies that could allow them to continue leading the consumer space in the coming months.

PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ - ETF report)

This product tracks the DWA Consumer Cyclicals Technical Leaders Index. It holds 38 stocks having positive relative strength (momentum) characteristics, with none holding more than 5.4% of assets. This approach results in a large cap tilt at 43%, followed by 31% in mid caps and the rest in small. About 30% of the portfolio is dominated by specialty retail while hotel restaurants and leisure, textiles apparel and luxury goods, and airlines round off the next three positions with double-digit exposure each. The fund has managed $277.8 million in its asset base while trades in a lower average daily volume of 58,000 shares. It charges 60 bps in annual fees and added about 0.7% over the past one month.
 
First Trust Consumer Discretionary AlphaDEX Fund (FXD - ETF report)

This follows an AlphaDEX methodology and ranks stocks in the consumer space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. This approach results in a basket of 129 stocks that are well spread out across each security, with none holding more than 1.7% of assets. About 49% of the portfolio is focused on mid cap securities with specialty retail being the top sector accounting for nearly one-fourth of the portfolio, closely followed by media (15.8%). FXD is one of the popular and liquid ETFs in the consumer discretionary space with AUM of $2.4 billion and average daily volume of 456,000 shares per day. It charges a higher 63 bps in annual fees and gained 0.9% over the past one month (read: 4 Solid Reasons to Buy Consumer Discretionary ETFs).
 
Market Vectors Retail ETF (RTH - ETF report)

This fund provides exposure to the retail segment of the broad consumer space by tracking the Market Vectors US Listed Retail 25 Index. It holds about 26 stocks in its basket with AUM of $147.6 million, while average daily volume is light at around 62,000 shares. Expense ratio came in at 0.35%. It is a large-cap centric fund that is heavily concentrated on the top firm Amazon.com (AMZN - Analyst Report) with 15.3% share, closely followed by Home Depot (HD - Analyst Report) at 8.9%. Sector wise, specialty retail occupies the top position with 29% share, followed by a double-digit allocation each to Internet & catalogue retail, hypermarkets, drug stores, and health care services. The product has added 5.3% over the past month (read: Retail ETF Hits New 52-Week High).
 
SPDR S&P Retail ETF (XRT - ETF report)

This product tracks the S&P Retail Select Industry Index, holding 104 securities in its basket. It is widely spread across each component as none of these holds more than 1.47% of total assets. Small-cap stocks dominate about two-thirds of the portfolio while the rest have been split between the other two market cap levels. In terms of sector holdings, apparel retail takes the top spot with 22.3% share while specialty stores, automotive retail, and Internet retail also have a double-digit allocation each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $948.4 million and average daily volume of more than 4.1 million shares. It charges 35 bps in annual fees and gained 2.5% in the past one month.