Unnoticed by many market participants is the large portfolio allocation Amazon.com, Inc. (AMZN) stock holds in popular U.S. consumer discretionary ETFs. The company generates more than $374 billion from its retail channels, making it a core holding for most U.S. consumer discretionary ETFs.
Yet market participants think of and value Amazon as a tech company rather than a retailer thanks to its cloud computing division and online ad business, which generate a substantial $90 billion in revenue. Even more, Amazon’s stock has a 78% correlation with the daily returns to the tech-heavy Nasdaq-100 Index, meaning, on an average trading day, its stock moves in tandem with other large cap tech stocks.
Because of this, investors in consumer discretionary ETFs need to keep an eye on and understand Amazon’s concentration risk to their ETFs. Indeed, Amazon’s stock movements significantly influence the most popular consumer discretionary ETFs, as its stock often represents a sizable proportion of their portfolio, as seen below.
US Consumer Discretionary ETFs Allocation To Amazon
Weightings as of April 25, 2022. PEZ and PSCD have no allocation to the stock due to their selection criteria methodology.
Unfortunately, 2022 has been a tough year for Amazon investors, as traders have become increasingly worried about inflation and how internal costs will hit consumer pockets, leaving them with less money to spend on nonessential items.
These inflation worries have also hit the sector, with the S&P 500 Consumer Discretionary Select Sector Index declining 18.90% year to date and underperforming the S&P 500 by almost 6% during the same period. Meanwhile, Amazon’s stock has not been immune to the overall market decline, having a shocking year-to-date return of -25.11% and a one-year loss of –28.03%.
1-Year TR Performance Of AMZN & XLY
(For a larger view, click on the image above)
A clear example of how Amazon can impact the overall returns of an ETF can be seen in the largest ETF in the segment, the Consumer Discretionary Select Sector Fund (XLY), which allocates 21.42% of its portfolio to Amazon stock. The large allocation is due to its market-cap-weighted methodology.
Year to date, the stock has represented a drag of about 574 basis points on the overall XLY portfolio. If one looks at the one-year performance attribution, Amazon’s 27.74% loss has seriously impacted XLY, which had a one-year total return of -6.17%, and Amazon contributed with about 7.70% of the losses.
Investors looking to reduce Amazon company risk in their consumer discretionary allocation can look to the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD) or the First Trust Consumer Discretionary AlphaDEX Fund (FXD), which do not use cap weighting, to avoid excessive portfolio concentration.
Another option is the Invesco S&P SmallCap Consumer Discretionary ETF (PSCD), which restricts its investment universe to the S&P SmallCap 600 Index and uses allocation caps. Although these ETFs mitigate Amazon’s concentration risk, they also expose investors to small size and momentum factor tilts, which drift away from a pure sector play.
Contact Luis Guerra at [email protected]