Until the second half of 2015, the stock market had experienced its best six-year run since the 1990s. As it has historically done in strong markets, the consumer cyclical sector has led the charge, returning 105.44% over the last five years and outperforming all other sectors. The consumer cyclical sector, also referred to as the consumer discretionary sector, is comprised of companies that produce goods and services that people want to buy but do not necessarily need, so it typically underperforms the stock market during economic downturns. When the economy turns around, sales of cyclical goods and services increase. The performance of industries such as retail, apparel companies, automobiles and leisure and entertainment are very much tied to the state of the economy, which is tied to consumer confidence. This is why companies such as Target Corporation (NYSE: TGT), The Home Depot Inc. (NYSE: HD), Comcast Corp. Class A (NASDAQ: CMCSA), Walt Disney Company (NYSE: DIS) and Amazon.com Inc.
(NASDAQ: AMZN) are often among the top holdings in many consumer cyclical exchange-traded funds (ETFs).
For most investors, consumer cyclical ETFs offer the best way to participate in the sector. These ETFs offer a broadly diversified portfolio across all cyclical industries. There are 21 consumer cyclical ETFs from which to choose. Investors should first consider the larger ETFs, because they offer the greatest diversification and the scale to keep investment costs to a minimum.
Consumer Discretionary Select Sector SPDR
As of March 23, 2016, the Consumer Discretionary Select Sector SPDR (NYSEARCA: XLY) had $10.29 billion in assets under management (AUM), which was five times the size of its closest rival. The fund is highly liquid, with an average daily trading volume (ADTV) of 7.2 million shares. Utilizing a replication strategy, XLY seeks to provide investors with market capitalization-weighted exposure to companies listed in the Consumer Discretionary Select Sector Index. The fund’s top five holdings, which make up 34% of the portfolio, are Amazon.com, Home Depot, Disney, Comcast and McDonald’s Corporation (NYSE: MCD). XLY ranks in the top 1% in its category for 10- and five-year returns of 10.24 and 16.92%, respectively. The fund’s trailing 12-month yield is 1.50%, and its expense ratio is 0.14%.
First Trust Consumer Discretionary AlphaDEX ETF
The second-largest fund is the First Trust Consumer Discretionary AlphaDEX ETF (NYSEARCA: FXD), with $1.96 billion in AUM. The fund’s ADTV is 494,140 shares. Utilizing a proprietary AlphaDEX selection process, FXD seeks to track the performance of the StrataQuant Consumer Discretionary Index, which was designed by the New York Stock Exchange (NYSE) to select stocks from the Russell 1000 Index with the potential to generate positive alpha relative to traditional passive-style indexes. As of March 22, 2016, none of its holdings exceeded 1.75% of the portfolio. FXD’s top five holdings are Dick’s Sporting Goods Inc. (NYSE: DKS), Dillard’s Inc. (NYSE: DDS), Fossil Group Inc. (NASDAQ: FOSL), Visteon Corporation (NYSE: VC) and DSW Inc. (NYSE: DSW). The fund’s five-year return is 11.88%, and its three-year return is 11.40%. FXD's expense ratio is 0.63%.
Vanguard Consumer Discretionary ETF
The Vanguard Consumer Discretionary ETF (NYSEARCA: VCR) is the third-largest consumer discretionary fund with $1.83 billion in AUM. Its ADTV is 152,117 shares. The fund uses an indexing investment approach to track the returns of the MSCI US Investable Market Index (IMI)/Consumer Discretionary 25/50, which is made up of large- , mid- and small-cap companies. As of March 21, 2016, its top five holdings comprised 27% of the portfolio, and included Amazon.com, Home Depot, Disney, Comcast and McDonald’s. Over the last 10 years, the fund returned 9.69%, and over the last five years, it returned 16.04%. VCR's trailing 12-month yield is 1.39%, and its expense ratio is 0.10%.