Consumer Discretionary ETFs Rise on Spending, Tesla

The U.S. consumer is still spending as holiday travel reaches record levels.

The consumer discretionary sector lagged the broader market early in 2024, but that trend has reversed as the summer travel season arrived and consumer ETFs are outperforming the S&P 500 again.

In the past month, the Consumer Discretionary Select Sector SPDR Fund (XLY) has risen more than 6% while the SPDR S&P 500 ETF Trust (SPY) gained just over 4%.

AAA has predicted a robust travel for summer 2024, including a record-breaking 71 million travelers for the 4th of July holiday week.

Typical holdings in consumer discretionary stock funds that can benefit from surging summer travel include Booking Holdings, Airbnb, Inc., Hilton, Marriott, and Carnival Corporation.

A recent surge in Tesla stock has also contributed to consumer discretionary stock fund performance.

Can the performance momentum continue? What’s the outlook for the consumer discretionary sector?  

See the top consumer discretionary ETFs and learn more about the sector, including the pros and cons of investing in this cyclical market segment.

What Is a Consumer Discretionary ETF? 

A consumer discretionary ETF, also known as a consumer cyclical ETF, is an exchange-traded fund that tracks a basket of stocks in the consumer discretionary sector. The consumer discretionary sector includes companies that sell products and services that are not considered essential to daily life, such as: 

• Entertainment: Movie theaters, theme parks and casinos 
• Leisure: Sporting goods stores, amusement parks and casinos
• Travel: Airlines, hotels and cruise lines
• Retail: Clothing, electronics and furniture stores 

Consumer discretionary ETFs can be a good investment option for investors who want to gain diversified exposure to the consumer discretionary sector and believe that the sector is poised for growth, but do not want to pick individual stocks.  

Examples of Consumer Discretionary Stocks 

Here are some of the top stocks in the consumer discretionary sector as of July 2, 2024: 

• Amazon (AMZN): Amazon is a leading e-commerce company that also offers cloud computing services. The company is expected to continue to grow its revenue and earnings at a fast pace in the coming years. 
• Tesla (TSLA): Tesla is a leading electric vehicle maker that is also developing self-driving car technology. The company is expected to continue to grow its market share in the electric vehicle market and to benefit from the growth of the self-driving car market. 
• Nike (NKE): Nike is a leading athletic apparel and footwear company. The company is expected to continue to grow its revenue and earnings at a steady pace in the coming years, driven by strong demand for its products. 
• Disney (DIS): Disney is a leading entertainment company that owns a variety of assets, including theme parks, movie studios and television networks. The company is expected to continue to grow its revenue and earnings at a steady pace in the coming years, driven by strong demand for its content and experiences. 
• Home Depot (HD): Home Depot is a leading home improvement retailer. The company is expected to continue to grow its revenue and earnings at a steady pace in the coming years, driven by strong demand for its products and services. 

What Is the Outlook for the Consumer Discretionary Sector? 

The outlook for the consumer discretionary sector in 2024 is mixed, leaning negative. The sector could perform well if the economy improves and inflation subsides, achieving a soft landing, but it could also underperform if the economy weakens and inflation remains high, squeezing consumer spending. Investors should carefully consider the risks and rewards of investing in the consumer discretionary sector before making any investment decisions.

Factors Supporting Favorable Consumer Discretionary Sector Outlook 

• A gradual improvement in the economy, as inflation subsides and the Federal Reserve begins to ease interest rates. 
• Strong consumer spending, as households continue to benefit from rising wages and a tight labor market. 
• Continued growth in e-commerce, which is benefiting many consumer discretionary companies. 

Factors Supporting Negative Consumer Discretionary Sector Outlook 

• Rising costs, which could squeeze margins for consumer discretionary companies. 
• A potential recession while inflation remains relatively high, which could lead to lower consumer spending. 
• Increased competition from foreign companies, if tariffs are reduced or eliminated. 

Consumer Discretionary Subsectors That Could Perform Well in 2024 

• Home improvement: Home improvement retailers are well-positioned to benefit from strong consumer demand for home improvement products and services. 
• E-commerce: E-commerce retailers are expected to continue to grow in popularity, as more and more consumers shop online. 
• Luxury goods: Luxury goods companies could benefit from strong demand from wealthy consumers, even if the economy weakens. 
• Travel and leisure: Travel and leisure companies could continue to rebound in 2024, as consumers are traveling more after the pandemic. 

It’s important to note that these are just a few examples, and there are many other subsectors of the consumer discretionary sector that could perform well or poorly in 2024. Investors should do their own research before investing in any specific company or subsector. 

Top Consumer Discretionary ETFs by AUM 

The top consumer discretionary ETFs with the largest total assets are: 

• Consumer Discretionary Select Sector SPDR Fund (XLY) 
• Vanguard Consumer Discretionary ETF (VCR) 
• First Trust Consumer Discretionary AlphaDEX Fund (FXD) 
• Fidelity MSCI Consumer Discretionary Index ETF (FDIS) 
• Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD) 

Pros and Cons of Investing in Consumer Discretionary ETFs 

Consumer discretionary ETFs offer investors many potential advantages, including diversification, exposure to consumer trends and potential for growth. However, investors should also be aware of their potential risks, such as the cyclical nature and market volatility of consumer discretionary stocks.  

Here are some of the key pros and cons of investing in consumer discretionary ETFs: 

Pros 

• Diversification: Consumer discretionary ETFs provide instant diversification by including a variety of companies within the sector. This can help spread risk across different industries and companies. 
• Exposure to consumer trends: Investing in the consumer discretionary sector can provide exposure to changing consumer preferences and trends. As the economy evolves and consumer behavior shifts, ETFs can capture potential growth opportunities. 
• Potential for growth: When the economy is doing well and consumer spending is on the rise, the companies in the consumer discretionary sector can experience significant growth, leading to potential capital appreciation. 
• Liquidity: ETFs trade on stock exchanges, making them easily tradable throughout the trading day. This provides flexibility for investors to buy or sell shares whenever the market is open. 

Cons 

• Cyclical nature: The consumer discretionary sector is highly cyclical, meaning it is heavily influenced by economic cycles. During economic downturns, consumer spending on nonessential items tends to decrease, which can lead to lower returns or even losses for the ETF. 
• Market volatility: Consumer discretionary stocks can be more volatile than other sectors, especially during times of economic uncertainty. This can lead to larger price swings and potential for higher risk. 
• Dependence on consumer sentiment: The performance of consumer discretionary companies is closely tied to consumer sentiment and disposable income. Economic downturns or changes in consumer behavior can impact the sector negatively. 
• Sector-specific risks: Consumer discretionary stocks are susceptible to risks specific to the sector, such as changes in consumer tastes, competition, regulatory changes and technological advancements. 
• Company-specific risks: Even though consumer discretionary ETFs provide diversification, they still contain individual stocks that might face company-specific challenges, such as poor management decisions or financial difficulties. 
• Limited dividend income: Many consumer discretionary companies reinvest their profits into growth initiatives rather than paying dividends. As a result, these ETFs might not provide substantial dividend income. 

Bottom Line on Investing in Consumer Discretionary ETFs 

The consumer discretionary sector is sensitive to economic growth, and it can benefit from strong consumer spending. However, it is important to remember that consumer discretionary ETFs can be more volatile than other types of ETFs, such as those that track the S&P 500 index. This is because consumer discretionary stocks are more sensitive to economic fluctuations. 

In summary, investing in consumer discretionary ETFs can offer exposure to potential growth and consumer trends, but it also comes with risks related to economic cycles, market volatility and sector-specific challenges. Before investing, it's important for investors to carefully consider their investment goals, risk tolerance and overall portfolio diversification strategy. For investors interested in this sector, it's a good idea to conduct thorough research to make informed investment decisions.