Consumer Discretionary ETFs On A Roll

January 07, 2014

Last year, the consumer discretionary sector, led by Netflix and Best Buy, was the best-performing category in the Standard & Poor’s 500 index, gaining 41 percent for the year. For its part, the S&P had its best year since 1997, gaining 30 percent.

Related ETFs, led by the $1.4 billion Vanguard Consumer Discretionary ETF (VCR | A-90), also had outsized, if not similar, gains. VCR gained 46.3 percent last year, followed by the $7.5 billion Consumer Discretionary Select Sector SPDR Fund (XLY | A-88), which returned 45.6 percent, and the $538.2 million iShares Dow Jones U.S. Consumer Services Sector ETF (IYC | B-87), which gained 43.7 percent.

One of the factors driving the consumer discretionary sector is what appears to be a growing sense among consumers that, slowly, the U.S. economy is recovering and growing, which has led them to open their pocketbooks more readily.

Consumer discretionary is a broad category that includes nonessential goods and services such as department stores, restaurants and entertainment companies. In contrast, the consumer staples category includes food and pharmaceutical companies such as CVS Caremark and Costco.

XLY_vs._VCR_vs._IYC_2013_Peformance

Chart courtesy of StockCharts.com

XLY has an annual expense ratio of 0.18 percent, or $18 for every $10,000 invested, and offers the best liquidity of all three funds. That high liquidity keeps total costs down, according to an IndexUniverse analyst report.

Vanguard’s VCR holds far more stocks (367 versus XLY’s 83) and costs just 0.14 percent, or $14 for every $10,000 invested.

The very cheapest—and newest—fund in the segment, the Fidelity MSCI Consumer Discretionary ETF (FDIS), which comes with an expense of 12 basis points, has Amazon, Comcast and Disney as its top three holdings. It came to market in October 2013.

iShares’ IYC stands out from the other funds for its relatively high expense ratio of 0.46—$46 for every $10,000 invested, but “decent tracking and good liquidity keep the fund’s all-in costs down,” according to its IndexUniverse report.

XLY and VCR both track a market-cap-weighted index of consumer discretionary stocks drawn from the S&P 500 and both currently make Amazon, Comcast and Walt Disney their top three holdings.

iShares’ IYC also tracks a market-cap-weighted index of stocks, and makes Amazon and Comcast its top two holdings, and Walmart its third.

S&P Capital IQ is bullish on all three ETFs—VCR, XLY and IYC— ut they are not the same, according to Todd Rosenbluth, director of ETF & Mutual Fund Research at S&P Capital IQ.

Rosenbluth noted that VCR has a greater midcap and small-cap exposure to discretionary stocks, is more diversified at the portfolio and industry level, but also has the highest beta (1.03) of the three ETFs, offering the possibility of a higher rate of return and risk.

Meanwhile, XLY, which focuses on just S&P 500 index companies, is more concentrated but has a greater focus on discretionary stocks with stronger balance sheets. And IYC invests 75 percent of its assets in stocks S&P considers consumer discretionary, with the rest mostly in consumer staples stocks like Walmart and CVS Caremark.

“This reduces the risk profile of both the holdings and performance (beta of 0.90),” said Rosenbluth.

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