One of strongest themes used by fundamental investors is to analyze consumer discretionary spending. Discretionary income is the amount of money that is left over for spending, investing or saving after taxes and personal necessities have been taken care of. During periods of economic prosperity this can be one of the most lucrative areas of investment and can often be home to the high-fliers that are commonly discussed on the news. (For more on this topic, see Consumer Spending As A Market Indicator.)

Have you ever found yourself wondering how to invest in the companies that sell products that most of your friends and family seem to be buying? Peter Lynch, one of the greatest investors in history, had a common saying: “invest in what you know.” As Lynch suggests, investing in companies that sell popular products and that are easily recognizable is a valuable method for creating a portfolio. One way to gather a short list of these types of investments would be to look into a basket of consumer discretionary stocks. (For more, check out Peter Lynch On Playing The Market.)

Consumer Discretionary ETFs

Exchange traded funds are publicly traded baskets of stocks that generally follow a certain theme. Luckily for traders, there are several ETFs that are readily available and provide exposure to consumer discretionary companies. One of the most popular ETFs in this segment is the Consumer Discretionary Select Sector SPDR ETF (XLY). The fund consists of 87 holdings and has total net assets of $4.92 billion. (For related reading, check out 3 High-Flying Consumer Discretionary Stocks.)

From a trader’s perspective, the ETF is trading within a strongly defined uptrend and is near a very influential level of support. As you can see from the arrows in the chart below, the nearby 200-day moving average has been able to prop up the price several times so far in 2014. The move off of the average acts as a level of downside protection and technical traders will expect the uptrend to continue until the price closes below the red line. 



Investing In Consumer Discretionary Stocks

Depending on your risk profile, you may want to invest in an entire basket of stocks such as the XLY ETF or you may choose to delve into its holdings for an individual stock that you feel will outperform the rest. If you fall into the latter camp, then you’ll want to examine the top five holdings of XLY.

Company

Recent Price

Weight (as of May 28)

Walt Disney Co. (DIS)

$84.03

6.68%

Comcast Corp. Class A (CMCSA)

$52.07

6.63%

Amazon.com Inc. (AMZN)

$313.78

5.66%

Home Depot Inc. (HD)

$79.90

5.50%

McDonalds Corp. (MCD)

$101.4

4.92%

From a consumer discretionary perspective, there are few companies less recognizable than Walt Disney. Since entertainment is one of the biggest areas of consumer spending it isn’t surprising to see DIS at the top of the list. As you can see from the chart below, DIS has recently achieved a new all-time high and is trading within a prolonged uptrend. Long-term traders have profited handsomely from buying shares of this well-known company and there doesn't appear to be any technical signal to suggest that this trend will reverse any time soon.



The Bottom Line

When looking for an investment idea sometimes the best method is to follow Peter Lynch’s advice and invest in what you know. Given the popularity of exchange traded funds, it's possible for the average investor to allocate to a basket of companies that fit this criterion, such as the Consumer Discretionary Select Sector SPDR ETF. For those more adventurous, a short list of investment ideas could be gathered by examining the top holdings of that ETF. (For more on this topic, check out Playing The Recovery With Consumer Discretionary.)


Tickers in this Article: XLY, DIS, AMZN, HD

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