Everybody loves a good deal, but investors are wary of the markdown on consumer discretionary stocks.

Down about 6%, consumer discretionary has been this year’s worst-performing sector so far. Despite a recent positive retail sales report and a few days of strong inflows into sector-based exchange-traded funds, the broad consensus is that the sector faces an uphill battle.

“The consumer discretionary sector is at a bit of a crossroads, only because you still see strong economic growth and supportive, overall healthy labor markets,” said Matt Bartolini, global head of research strategists at State Street Investment Management. But wage growth hasn’t kept pace with job gains, consumer prices remain stubbornly elevated and the Fed’s recent rate hike adds to the pressure. “It would be hard to say, given that macro backdrop, that this is, I don’t want to be so hyperbolic, but a falling knife worth the catch.”

Prime Suspect

State Street’s Consumer Discretionary Select Sector SPDR ETF (XLY) is the largest fund in the sector, at about $21 billion, and is down a little more than 5% this year. The fund is top heavy, with Amazon and Tesla making up about 40% of the fund’s weight, and while Tesla’s stock is down about 14% year to date, Amazon’s performance (up about 12% this year) is holding up the fund. “You almost have to sort of carve out Amazon from the broader trends,” Bartolini said. “Six of the nine industries within consumer discretionary are going to have or have had their earnings growth expectations for 2027 be revised lower over the last three months … which should maybe give some indication of what the broader sector might be doing outside of a single name.”

Other funds covering the sector include:

• The $413 million Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD), which is down about 6% this year, per ETFDb data.
• Pure retail funds are doing a little better, with the State Street SPDR S&P Retail ETF (XRT) down about 1% and the VanEck Retail ETF (RTH) up almost 3%.

On the Xly: XLY had two days with inflows of about $600 million each this month (though it did also have a day with $670 million in outflows). There are a couple of plausible reasons for this. “The new retail sales report could have been inspiring some more flows to go into it at these lower prices,” said Roxanna Islam, head of sector and industry research at VettaFi. “People are starting to read a little bit more into the economy and trying to think of when the consumer can actually flip.” But Bartolini suggested that it could also have been a trading play, with investors shorting the fund in anticipation of the rate hike.

Regardless, the switch hasn’t yet flipped for consumers. “There’s certainly a case to be made for a turnaround,” said Brian Paoli, research analyst for Morningstar. “It’s too soon to tell … but I wouldn’t be surprised if we start to see more inflows into the consumer discretionary space.”

In the event of an AI doomsday, some (human) ETF investors could win big.

That is, of course, if people aren’t extinct and money continues to have any meaning or value. For those willing to brave the odds, Direxion is planning to offer its AI Doomsday Prediction Markets ETF. The company recently filed with the Securities and Exchange Commission for that fund, along with one that plays the other side of the odds, the Direxion AI Prosperity Prediction Markets ETF. And, it’s prepping two others: the Direxion El Niño and La Niña ETFs. Because, why not bet on the weather?

“This is kind of Direxion’s thing … They’re not afraid to launch different types of strategies,” said Craig Kilgallen, relationship manager at Fuse Research Network. “Their followers and audience know them for it.”

A Doomsday by Any Other Name

For seemingly obvious reasons, the doomsday fund would not make bets on societal collapse or a hostile robot takeover. Rather, it aims to take positions via event contracts on the development and outcomes of AI on the economy, including job reductions and high unemployment rates. But it, along with the other three prediction-market funds Direxion is hoping to launch, falls into the novel ETFs category that the SEC is evaluating. The regulator collected public comments on them through Aug. 31 and may soon decide whether such products can list on exchanges, and if so, how they are treated compared with more traditional funds.

It also appears to be Direxion’s first attempt at betting-style ETFs. Most of the company’s footprint is in leveraged funds, though it also offers a line of defined-income ETFs, an equal-weight fund and a handful of others. The company did not respond to a request for comment about the proposed funds, and it does not appear to be among the firms that submitted comments to the SEC about novel ETFs. But others, like ProShares, urged the regulator to avoid treating a range of new or proposed categories, ranging from crypto to event contracts, as “novel.”

“Rather than create a new category of ETFs, we believe a more effective approach would be to address the particular features and risks of new asset classes and strategies through tailored, principles-based disclosure,” ProShares general counsel Richard Morris wrote in his comments.

In addition to the AI and weather funds, Direxion separately filed for another line of ETFs:

• It proposed four key performance indicator funds focused on SpaceX, Tesla, Anthropic and OpenAI.
• Those funds would hold binary-option event contracts that take positions on outcomes of company-specific KPIs.

Never Tell Me the Odds: The popularity of prediction markets like Kalshi and Polymarket seems to make a case for betting within the ETF wrapper, Kilgallen said. And, like with crypto, it could lower the barrier to entry, he noted. “It makes it easier for people who might have an interest but don’t want to go through the hassle of figuring it all out.”

Fund managers are going nuclear.

Themes ETFs and GraniteShares both filed prospectuses for leveraged single-stock funds of two nuclear companies expected to IPO soon. Both are prepping 2X long/short ETFs for Westinghouse, which is targeting an initial public offering in October. Themes ETFs also filed for a 2X long/short fund for Holtec Nuclear Corporation, which recently postponed its planned September IPO. It’s the latest sign of renewed interest in nuclear energy as the US’s need for power balloons alongside the AI buildout.

“What we’re seeing is the early stages of a nuclear renaissance,” said James West, head of energy and power research at Melius Research. “The perception that nuclear is dangerous — and the NIMBYism that has gone along with that for a long time — has faded.” While we’re still likely a decade out from the real boom, “nuclear fuel is the real future,” he said.

Wave Spotting

Fund managers have to try to get in front of the demand for a product so that they’re already on the market when people become interested, said James Seyffart, ETF analyst at Bloomberg Intelligence. “Roundhill filed for DRAM long before anyone was talking about DRAM as a huge part of the AI play,” he said. Issuers “want to catch [the wave] before it starts cresting in any way whatsoever. They want to get it while it’s still out deep in the ocean.”

Two other issuers recently filed prospectuses for thematic ETFs along similar lines:

• Roundhill filed for an AI Power and Infrastructure ETF that will invest in companies whose business is “power generation equipment and systems used to serve data center and other large electrical loads,” which includes nuclear reactors.
• Another firm, Kayne Anderson, is preparing its Energy Equity and Power Equity ETFs, which will invest in companies whose business is “energy-related endeavors” and electrical power or natural gas services, respectively.

Fission Impossible: There are multiple roads to success for funds like this — investors could use them to get exposure to a sector, or the funds may get into the zeitgeist, like DRAM. “They’re not doing this because they think there’s a 100% chance that this thing is going to take in tens of billions of dollars,” Seyffart said. “They think maybe this will be successful.”