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ETF Specialist

Cheap Exposure to U.S. Consumer Discretionary Stocks

This exchange-traded fund is one of the best bargains in the consumer cyclical Morningstar Category.

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 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. So this certainly is not a fund to own if one believes that the U.S. economy is headed toward a recession.

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 behavior, which tends to be tied to employment rates, consumer confidence, and income.

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