Consumer Discretionary, Staples ETFs Tell Different Tales

Retail ETFs are telling a tale of two economies.

As inflation jumps and tariffs take a bite out of purchasing power, the $16.2 billion Consumer Staples Select Sector SPDR Fund (XLP) is stagnating, unchanged over the past three months. That fund’s biggest holdings are low-cost giants like Costco Wholesale Corp. (COST) and Walmart Inc. (WMT).

On the other side of the strip mall, the story is different. The $22.7 billion Consumer Discretionary Select Sector SPDR Fund (XLY) and the $287.2 billion SPDR S&P Retail ETF (XRT) have both outpaced the S&P 500 over the past three months, as measured by the Vanguard S&P 500 ETF (VOO).

XRT, XLY Diverge From XLP

Consumer prices jumped 2.7% in June over the past year, the Bureau of Labor Statistics reported today, meaning those with less discretionary income are probably spending less. That was an increase from May, suggesting tariff costs are being passed on to consumers. Costs for household furnishings and operations rose faster than overall, jumping 3.3%.

“The divergence between consumer discretionary and consumer staples tells a tale of two economies,” etf.com Senior Content Editor Kent Thune, CFP, said. Higher-income consumers are still spending strongly on non-essentials, boosting consumer discretionary ETFs like XRT and XLY, he said, while XLP is being suppressed due to lower-income consumers are cutting back on staples.

XLY, XLP & XRT Performance—Source: etf.com Sectors Drilldown Tool & Factset Data

Also boosting discretionary companies is that they can generally pass along their increased costs to their customers, Thune said, while staples companies are forced to absorb tariff-related costs at the moment.  

“An ETF like XLY is more inflation-resistant while XLP would thrive more in a slower economy without the inflation pressures,” he said. “XLY can outperform in a stagflationary environment, but XLP can outperform in slower economy with inflation falling."

To that point, XLY, whose top holding is Amazon.com Inc. (AMZN), has pulled in $969.5 million over the past three months while it’s gained 17%. XRT, whose top holding is Bath & Body Works Inc. (BBWI), has seen a net $82.3 million in outflows while it’s jumped 21%. XLP, the consumer staples fund, has lost 0.4% and pulled in $82.5 million.

All three funds dipped today after the inflation numbers were reported.