ETF Specialist

Low-Cost Exposure to the Consumer Discretionary Sector

Ben Johnson, CFA

 Consumer Discretionary Select Sector SPDR (XLY) offers investors market-capitalization-weighted exposure to firms in the S&P 500 that rely on discretionary consumer spending, such as  Amazon.com (AMZN),  Home Depot (HD),  Walt Disney (DIS),  Comcast (CMCSA), and  McDonald's (MCD). This low-cost, highly liquid, market-capitalization-weighted exchange-traded fund contains retail, restaurant, media, apparel, luxury goods, automobile, and leisure firms and is a bet on consumer spending. However, investors interested in this ETF should beware. Consumer discretionary firms have a consistent history of outperforming in the early stages of a business cycle and underperforming late in a business cycle.

Because of its narrow focus and sector concentration, this ETF is best treated as a tactical satellite holding to complement a diversified portfolio. It's suitable for investors looking to bulk up their exposure to consumers' cyclical buying behavior, which tends to be tied to employment rates, consumer confidence, and income.

Ben Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.