ETF Spotlight: XLY Plunges With Consumer Sentiment

The Consumer Discretionary Select Sector SPDR Fund (XLY), which tracks companies that depend on consumer spending, has been one of the worst-performing sector exchange-traded funds in 2025 amid rising economic and market uncertainty.

An escalating trade war and concerns over higher inflation and a slowing economy pushed U.S. consumer sentiment down last month, hitting a 15-month low.

With consumers pulling back on non-essential purchases, companies in retail, travel and luxury goods have struggled, leading to underperformance in XLY.  

However, for long-term investors able to tolerate market volatility, these short-term struggles could present a buying opportunity as consumer spending tends to expand over time, especially in a consumer-driven economy like that of the United States.

How XLY Works and What It Invests In

XLY is a sector-specific ETF that tracks the Consumer Discretionary Select Sector Index, which consists of large U.S. companies in industries like retail, automobiles, e-commerce and leisure. The ETF is heavily weighted toward a few dominant stocks, with Amazon.com Inc. (AMZN) and Tesla Inc. (TSLA) typically making up a large percentage of its holdings.  

Other key components include Home Depot Inc. (HD), McDonald’s Corp. (MCD) and Nike Inc. (NKE). These companies tend to thrive during periods of strong economic growth but can struggle when consumer spending slows.

Pros and Cons of Investing in XLY

While XLY offers potential for long-term growth, there are risks associated with consumer discretionary stocks that investors need to understand.

Pros

• Exposure to leading consumer brands: XLY holds some of the biggest and most successful discretionary companies in the world.
• Growth potential: As consumer spending rebounds over time, these companies stand to benefit.
• Diversification within the sector: Investors gain exposure to multiple industries within the consumer discretionary space.

Cons

• Highly cyclical: The fund tends to decline sharply during economic downturns.
• Concentration risk: A few stocks, like AMZN and TSLA, make up a large portion of the ETF, potentially increasing volatility.
• Vulnerable to inflation and interest rate hikes: Higher costs and borrowing expenses can hurt consumer spending and corporate profits.

The Long-Term Outlook for XLY

While short-term volatility has made XLY one of the worst-performing ETFs recently, its long-term potential remains strong. Consumer discretionary companies tend to rebound as economic conditions improve, and innovations in e-commerce, automation and global expansion could drive future growth.  

However, investors should expect cycles of boom and bust, as consumer spending fluctuates with economic conditions. For those with a long-term investment horizon, dollar-cost averaging into XLY during downturns may provide an opportunity to benefit from an eventual recovery.