10 Top Consumer Discretionary ETFs to Buy
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Consumer discretionary stocks and exchange-traded funds (ETFs) have been among the most closely watched area of the market this year. That's because consumer spending, and the health of the economy broadly, are up in the air.
Consider the words of Brad Sorenson, Charles Schwab's managing director of market and sector analysis: "The outlook for American consumer spending appears to us to be solid, with consumer confidence still strong, a tight labor market and wages trending higher. However, spending on traditional retail items has been cautious and competition among retailers may limit profitability, while recent softening in auto sales and housing is worth paying attention to."
To wit, consumer spending in January (reporting was delayed because of the government shutdown) recovered less than expected, sparking worries among economists. But investors have been undeterred. Consumer discretionary stocks are the second-best performing sector on Wall Street this year (+18.6%), lagging only technology (+23.4%).
Here are 10 of the best consumer discretionary ETFs to buy if you're still optimistic about the American economy and consumer, and want to strike while the iron remains hot. These funds hold dozens if not hundreds of consumer stocks, allowing you to defray risk while investing in various slices of this consumer sector.
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Consumer Discretionary Select Sector SPDR FundMarket value: $13.4 billion
Expenses: 0.13%
The largest of the U.S.-listed consumer discretionary ETFs with $12.7 billion, The Consumer Discretionary Select Sector SPDR Fund (XLY, $117.44) is not only the largest consumer discretionary ETF at $13.4 billion in assets; it's also one of the 100 biggest ETFs in America, providing inexperienced investors with a relative sense of security.
The XLY represents the consumer discretionary stocks of the Standard & Poor's 500-stock index. At present, that's 64 stocks with a median average market cap of $15.2 billion. The smallest company in the index, Mattel (MAT), still is in mid-cap territory at $4.7 billion. In short, this is a fund filled mostly with large, blue-chip stocks.
Like the rest of the SPDR sector funds, XLY is cap-weighted, which means the larger the company's market capitalization (or market value), the larger its position in the portfolio. As a result, $908 billion Amazon.com (AMZN) represents up a whopping 24% of the fund's assets - a great thing if you believe in the future of e-commerce.
The top 10 holdings are a who's who of companies benefiting from growing American discretionary spending. As the consumer goes, so goes the XLY.
Lastly, it's cheap, at 13 cents for every $100 invested. That's not bad for a product that has delivered a roughly 9% average annual return since inception 20 years ago in December 1998 through February 2019.
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VanEck Vectors Retail ETFMarket value: $76.9 million
Expenses: 0.35%
The VanEck Vectors Retail ETF (RTH, $106.54) is a more focused ETF that holds only retail stocks, which results in a smaller portfolio of just 25 large-cap stocks.
RTH's top 10 holdings - which include the likes of Amazon, Home Depot (HD) and Walmart (WMT) - aren't much different than the XLY, but they do hold more sway; its top 10 account for about 70% of the ETF's roughly $80 million in assets, versus about 60% for the XLY.
However, the other difference between VanEck's product and SPDR's is that the former is just two-thirds invested in consumer discretionary stocks, while also holding consumer staples (25%) and health care (9%) companies. If you're the type of investor that believes a little defense isn't a bad thing, the consumer staples exposure should help you sleep better at night.
In business since December 2011, RTH has delivered an annual total return of 16.7% through the end of February.
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Fidelity MSCI Consumer Discretionary Index ETFMarket value: $676.6 million
Expenses: 0.08%
If thrifty is your middle name, Fidelity has the ETF for you.
The Fidelity MSCI Consumer Discretionary Index ETF (FDIS, $45.25) charges a mere 8 basis points (a basis point is one one-hundredth of a percent) - that's 5 basis points less than the already cheap XLY.
FDIS tracks the MSCI USA IMI Consumer Discretionary Index. The index selects companies using the Global Industry Classification Standard (GICS), weighting the companies by market cap. The ETF currently holds more than 290 stocks, with the top 10 - including Amazon, Home Depot, McDonald's (MCD) and Nike (NKE) - accounting for about 54% of assets. Again, AMZN stock is an overwhelming holding at a quarter of the fund's weight.
That said, while FDIS is considered a large-cap growth ETF, it does have a roughly 15% weight in mid-caps, 6% in small caps and roughly 3% in stocks that are less than $300 million in size. Amazon's heft makes "Internet & Direct Marketing Retail" its largest industry holding, but "Specialty Retail" (22%) and "Hotels Restaurants & Leisure" (19%) are well-represented, too.
In addition to a tiny fee, Fidelity's ETF has a low turnover rate of 5%. This means its entire portfolio turns over once every 20 years. Why does this matter? ETFs have to pay to buy and sell stocks, just like you and I, so the lower the turnover, the less fees can drag on the fund's performance.
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ProShares Online Retail ETFMarket value: $24.7 million
Expenses: 0.58%
As this analysis shows, it's difficult to talk about consumer discretionary ETFs without mentioning Amazon, the online industry's star company. That goes double for the ProShares Online Retail ETF (ONLN, $38.59), which invests in retailers that mostly sell online.
ONLN is a young fund that came to life in July 2018, but Inside ETFs already named it one of its "Hidden Gems of 2019." The fund has just 20 holdings, making it the most focused of all U.S.-listed consumer discretionary ETFs. Its components must have a market cap of at least $500 million, a six-month daily average volume of at least $1 million, and certain other requirements to qualify for inclusion. It's rebalanced monthly and reconstituted annually in June. No stock may account for more than 24% of the total portfolio - Amazon is, unsurprisingly, the top holding at 24% - and non-U.S. stocks can't represent more than 25% of the fund.
ONLN is part of ProShares' trio of ETFs focusing on retail disruption. The ProShares Decline of the Retail Store ETF (EMTY) gives investors an opportunity to short brick-and-mortar retailers and the ProShares Long Online/Short Stores ETF (CLIX) provides long positions in online companies and short positions in retailers that primarily generate revenue from physical stores.
Why such a focus on e-commerce? Because online sales currently account for approximately 10% of global retail sales, so it's a decent market already - and analysts expect that to double in just 11 years.
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iShares Evolved U.S. Discretionary Spending ETFMarket value: $5.7 million
Expenses: 0.18%
The iShares Evolved U.S. Discretionary Spending ETF (IEDI, $28.51) is another fresh face that celebrated its first birthday on March 21.
This is an intriguing option that's dangling a low expense ratio of 0.18% to attract investors. The managers of the fund use a proprietary classification system (which it uses across several Evolved ETFs) that relies on machine learning and natural language processing to evaluate consumer discretionary companies. In short, it's accessing 10-K's and other publicly accessible data to look for business models that are evolving and changing with the times.
IEDI invests in market caps of all sizes, but for all intents and purposes, it's a large-cap growth fund that has 79% of its assets invested in large companies. Any single industry is capped at 25% of the overall portfolio.
The big difference you'll notice between IEDI and its competition is that while Amazon is the biggest weighting, it only makes up 9.5% of the ETF's portfolio. It cuts both ways - while it does reduce single-stock risk, you're also less exposed to one of the most explosive retail companies on the planet. Time will tell whether this "underweight" will benefit IEDI.
Other top holdings include Costco (COST) and Apple (AAPL).
Retailers make up 44% of the ETF, followed by consumer services (16%) and food/staples retailers (14%).
One risk to point out is the fund's mere $6 million in assets under management. ETFs with less than $10 million in AUM often are considered at risk for closure, as they don't make enough money to warrant keeping them open. So if the fund doesn't grow in popularity over the next few years, there is a possibility that the ETF will be shut down.
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