Consumer Discretionary ETF In Focus: XLY

Apr.11.12 | About: Consumer Discretionary (XLY)

While the broader S&P 500 has gained a respectable 10% year-to-date, the Consumer Discretionary Select Sector SPDR (XLY) is up nearly 15% since the beginning of 2012. XLY represents a broad cross-section of the marketplace; just about anything nonessential you can imagine a consumer spending their money on, like eating out, apparel, or entertainment (among a great many other things) is represented by this ETF. The sector tends to do better when the economy is doing well and consumers have a little extra money burning that proverbial hole in their pockets.

XLY is composed of a several household names, and its five largest holdings should be familiar to anyone: McDonald's (8.45%), Walt Disney (5.55%), Home Depot (5.33%), Comcast (5.32%), and (5.18%). Its top subsector allocations should go a long way towards explaining why this ETF tends to do better in an expanding economy. Media (Walt Disney, Comcast, News Corporation, Time Warner, Directv, Viacom) is by far XLY's heaviest allocation at 29.11%, followed by Hotels, Restaurants & Leisure (McDonald's, Starbucks, Carnival, Starwood Hotel & Resort) at 19.11% and Specialty Retail (Nike, Coach, Limited Brands, Tiffany & Co) with 17.35%.

The fund's investment objective is a bit opaque, and seems to be a scattershot catch-all for what consumers might spend their extra money on. You could even say that after they split the S&P 500 up into sectors, they threw everything that was left over into Consumer Discretionary. XLY's fact sheet simply states that the fund "invests in industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing" without specifying how. Standard & Poor's website doesn't explain its Consumer Discretionary Select Sector Index's methodology either.

Regardless of the arcane fund composition methodology, since the commence of 2012 only one select sector has performed better than XLY's index: the Technology Select Sector.

Only the Technology Select Sectors has performed better (+15.89%) over the last year than the Consumer Discretionary Select Sectors (+15.61%).

XLY's performance is attributable to a few of its top large cap holdings, which, with the exception of McDonald's (down 0.2% on the year) are all up more than the S&P 500. Comcast, Home Depot, Disney, and Nike are all up 15% or more in 2012, and Comcast, the fund's 4th largest holding, is up a strong 25% on the year.

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Compare XLY's (in blue) year-to-date performance with the S&P 500 (red).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.