Consumer ETFs in a Post-Covid Economy

Covid shut us down.  

We shopped furiously, but what we purchased, tilted heavily toward what we could enjoy in our homes, rather than away from them. The pandemic caused governments to deliver money to our pockets, as lives were disrupted in a way we’d never experienced.  

And then, it passed. We returned to doing the things we loved that weren’t simply in walking distance. And oh, did we spend, and spend and spend some more. One analyst recently described it simply: Americans were handed $2 with the expectation that we’d spend $1 and save $1. 

That’s what happened in the past, but not this time. 

Post-Covid, and through this summer, we spent it all. In other words, the U.S. consumer did what they typically do in modern times. They shopped until they dropped, or, more correctly, until their savings dropped, and then until their credit card dropped their ability to spend more. 

A generational issue of low savings rates and low retirement savings appeared to have a silver lining via the pandemic. But the spending continued, and now average consumer balance sheets combined with high rates on consumer credit might finally constrain spending going forward.  

That spending decrease may negatively impact the “cyclical” segment of consumer stocks, as the non-cyclical “staples” like food and other required items tend to hold up better than optional items. And that should cause investors to start again in researching consumer ETFs to be sure they're in the right space for a slower economy ahead.  

How to Shop for Consumer ETFs

As is the case in all 11 sectors of the S&P 500, the largest sector-focused ETF is the original, from the set of 10 State Street products first listed on the stock exchange back in 1998. US ETFs now total more than 3,000, but back then they could be counted in dozens. So, when those 10 came to market (REITs were part of the financial sector, and later spun off to make 11 sector “Spider” ETFs), they made a lasting impact.

Thus, the $20 billion Consumer Discretionary Select Sector SPDR ETF (XLY) is the kingpin of this space and would benefit if consumers continue to spend money on non-essential goods and services. With an average market capitalization among its 50 stock holdings of about $240 billion, this one is dominated by a small number of huge stocks at the top. In fact, 25 stocks account for 90% of XLY, with the other 25 accounting for the remaining 10%.  

When we look inside XLY, we see that Amazon does to this ETF what it has done to consumer buying habits: It dominates, with a more than 21% allocation. Tesla is second at 18%, but with the volatility in that stock, that weighting flops up and down a lot. 

Home Depot occupies another 10% of XLY, so there are three stocks representing about half of this market leading ETF. There are pros and cons to that, depending on what an investor’s aim is. They may seek to own those three with some “coverage” around it, or they might just believe in focusing more of their investment in this sector to the market icons in the space.

Consumer ETFs: Focused vs Diversified Retail  

Beyond the holistic approach to the consumer discretionary (cyclical) sector, there are a pair of retail ETFs that go in opposite directions, in that one is concentrated, and one is diversified. The focused one is VanEck Retail ETF (RTH) which holds only 25 stocks, and the more diversified ETF is the SPDR S&P Retail ETF (XRT). So, advisors and investors can choose where they shop. In both cases, these retail ETFs currently trade at under one times trailing revenue.

The list of ETFs in this sector becomes narrow in terms of niche, all the way down to funds like the Amplify Travel Tech ETF (AWAY), which is quite specific.

Consumer Staples ETFs Cover the Essentials

Should consumers slow their spending on non-essential goods and services as expected, investors can expand their shopping list to funds like the Consumer Staples Select Sector SPDR ETF (XLP). When budgets tighten, consumers narrow down their purchases to the necessities like food, beverages, household products, and personal care items. Thus, XLP top holdings like Wal-Mart and Johnson & Johnson can continue to perform in a slower economy. 

Consumer spending is at a possible turning point. The ETF industry has created plenty of ways for investors to express their preferences.