Consumer ETFs Gain on Growing Spending

Recession? What recession? That’s the attitude firmly expressed by U.S. consumers in a key economic attitudes survey released this past Tuesday.  

The Conference Board’s monthly report on consumer confidence jumped to a 17-month high, indicating that, at least in their heads and hearts, consumers are feeling good about economic conditions. 

Even 2023’s “headline” stock market returns may be playing a role. Though those returns have been slanted heavily toward a small number of giant stocks, the bottom line is that the S&P 500 is up over 14% year to date, and the Nasdaq is closing out its best first half ever, up more than 38%. Perhaps the recent uptick in inflation is something consumers are getting used to. Or, maybe we just haven’t really seen the impact of those Fed rate hikes on the economy yet.  

That said, the last time consumers felt this good about current and future conditions, it was January 2022, the month the stock market peaked and started the worst combined year for stocks and bonds in modern history. 

Consumer spending is 70% of the U.S. economy, so not only do actual spending habits drive stock prices, so do attitudes toward the future. Investors looking to capitalize on continued strong consumer demand have plenty of ETFs to consider in their research. So too do investment advisors, as they serve the very consumers who are the source for a good chunk of that spending and confidence.  

Consumer Discretionary ETFs 

Consumer stocks can be owned via ETFs in a variety of ways, so it helps to understand the key differences between them. At the broadest level, consumer spending is at the center of two of the S&P 500’s 11 sectors. Consumer staples represent the everyday necessities we spend money on, while consumer durables, also known as consumer discretionary stocks, cover things we want but don’t necessarily need.  

Currently, staples make up about 7% of the S&P 500’s total allocation, while discretionary stocks account for just over 10% of the index. The latter group is often considered more directly tied to trends revealed through reports like Tuesday’s from the Conference Board. 

Targeting that group by owning the S&P 500 subsector, the $16 billion Consumer Discretionary SPDR ETF (XLY) has been the go-to for 25 years, making it one of the longest-running ETFs. However, its stock weightings are very crowded at the top. Amazon and Tesla represent a combined total of more than 40% of the fund. So, a fan of those companies can consider XLY a way to own them with some diversification around it.  

The same set of stocks held by XLY can be owned in an equal-weighted fashion through the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD), a much smaller fund than XLY ($484 million in assets). Its 54-stock portfolio is not especially cheap, at 22x trailing 12-month earnings, but it has bucked the market’s trend from the last 12 months in one respect: Its return over that period is 21%, while market-capitalization-weighted XLY has gained 15%.  

For those exploring for value in smaller consumer discretionary companies, the Invesco S&P SmallCap Consumer Discretionary ETF (PSCD) is a 13-year-old fund with a mere $26 million in assets spread across 85 stocks, but sports a P/E ratio of just under 10. 

The U.S. consumer remains enthusiastic. While it remains to be seen for how long that confidence endures, ETF investors can be confident in their ability to research, identify and capitalize on future growth in consumer discretionary stock prices.