ETF Monkey Focus: Consumer Discretionary ETFs

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Includes: AMZN, FDIS, VCR, XLY
by: ETF Monkey

Summary

Every investor desirous of developing an ETF-based portfolio does well to start by selecting a few core holdings.

To this core, however, investors may wish to add specific exposure to certain sectors of the market. In my most recent article, I focused on the Consumer Staples sector.

In this article, I will evaluate three competitors in a related sector, Consumer Discretionary, that meet the ETF Monkey Focus criteria.

Based on that first bullet point in the summary, in previous articles in the ETF Monkey Focus series, I have featured U.S. Total Market ETFs, U.S. Broad-Market Bond ETFs and International Total Market ETFs, as well as sub-categories of some of these, such as S&P 500 ETFs and Emerging Market ETFs.

Here is a handy index to all ETFs covered to-date, including a link to the first article in the series, which highlights the criteria I used for ETFs to be included as well as common features that I hope will make these articles very useful tools for an investor as they begin their research. This article brings the total to 33 ETFs I have covered in this series.

With their core intact, however, investors may wish to add exposure to specific sectors of the market, based on their personal needs and risk profile. In my most recent article, I began with an overview of the Consumer Staples vs. Consumer Discretionary sectors and then reviewed 3 Consumer Staples ETFs. Please feel free to review that article if you are new to these sectors and would benefit from that overview.

Why Include Consumer Discretionary In Your Portfolio?

Why might you want to include a specific allocation to the Consumer Discretionary sector in your portfolio? In the previous article referenced above, I noted that "a picture is worth a thousand words" and then offered a nice graphic with respect to the Consumer Staples index as compared to the broader S&P 500.

In the picture below, I build on that perspective by next comparing how the Consumer Discretionary sector performed against the Consumer Staples sector over that same period. Have a look.

^IXY Chart

^IXY data by YCharts

The blue line in the above picture represents an AMEX consumer discretionary index, the orange line an AMEX consumer staples index. As I did with the picture in the first article, I purposely included the terrible 2007-2009 recession, shaded in gray.

If you ponder the two lines carefully for a minute, you will likely very quickly draw the correct inference that the consumer discretionary sector is very much tied to the performance of the economy. While both sectors (along with pretty much everything else) declined during that 2007-2009 period, the consumer discretionary sector declined at about twice the rate of consumer staples. Conversely, if you focus on the point just inside the gray-shaded area when the market turned upwards, over time the consumer discretionary sector both caught and passed the consumer staples sector in terms of gains.

Simply put, when the economy stumbles, you will likely want to at least underweight, if not avoid, this sector in favor of a more defensive sector such as consumer staples. However, in good times, this sector has the potential to turbocharge your returns. Of course, I must offer all the usual caveats with respect to how difficult it is to time the market. Still, now that you understand the basics of how the sectors compare, you can make weighting decisions based on your instincts with respect to the state of the economy.

The Competitors

With that basic introduction out of the way, let's take a look at three Consumer Discretionary ETFs. Each are worthy competitors. And, they may be even more worthy if your brokerage offers commission-free trading in these ETFs, particularly if one of your goals is to invest regularly and in small increments.

In the following table, you will find key high-level profile and portfolio information.

FDIS

VCR

XLY

ETF Name

Fidelity MSCI Consumer Discretionary Index ETF

Vanguard Consumer Discretionary ETF

Consumer Discretionary Select Sector SPDR Fund

Assets Under Management (AUM)

$263.4 Million

$2.1 Billion

$12.65 Billion

Index Tracked

MSCI USA IMI Consumer Discretionary Index

MSCI US IMI Consumer Discretionary 25/50 Index

Consumer Discretionary Select Sector Index

Number of Holdings

369

378

87

Weighting of Top-10 Holdings

43.96%

44.00%

54.68%

30-Day SEC Yield

1.42%

1.34%

1.29%

Expense Ratio

.084%

.10%

.14%

Average Spread

.12%

.05%

.01%

Notes on terms that may be unclear:

  • 30-Day SEC Yield refers to the dividend income available to shareholders minus the fund's expenses for the most recent 30-day period. This measurement was introduced by the SEC to ensure fair comparative reporting between funds.
  • Average Spread refers to the average price difference between the price buyers were willing to pay and sellers were willing to sell, averaged over the latest 45 days.

Here is a brief overview of each of the ETFs in alphabetical order by ticker symbol.

Important Note: Please be aware that Amazon.com (NASDAQ:AMZN) constitutes far and away the largest single component of this sector. AMZN's weighting is 11.24% in FDIS, 11.00% in VCR, and a whopping 13.88% in XLY. In other words, as goes Amazon, so goes this sector to a fairly substantial degree.

Fidelity MCSI Consumer Discretionary Index ETF

With an inception date of 10/21/13 and a relatively small AUM of $263.4 million, FDIS is far newer and smaller than either of its competitors in this segment. Eager to be competitive in the space, Fidelity offers a segment-leading .084% expense ratio. Additionally, Fidelity clients can trade this ETF commission-free, making it perhaps even more attractive for this subset of investors.

FDIS tracks basically the same index as Vanguard's VCR, as can quickly be seen from comparing the Top-10 holdings and even its complete list of holdings. There are minor variances in weighting and positioning between the ETFs, but nothing significant enough to be worthy of note. I will feature this index in more detail in my review of VCR in the next section. Due to its far smaller size, at .12% FDIS carries a significantly higher average trading spread than either VCR or XLY. It must be noted that this difference could easily offset the benefit from the slightly lower expense ratio.

Here is a look at FDIS's exposure breakdown:

Next, its Top 10 holdings:

Vanguard Consumer Discretionary ETF

With an inception date of 1/26/04 and AUM of $2.1 billion, VCR is a premier player in this sector. While, at .10%, its expense ratio is slightly higher than segment leader FDIS, it offers superior tradeability, with an average spread of .05%.

VCR tracks the MSCI US Investable Market Consumer Discretionary 25/50 Index. The index is comprised of a benchmark of large-, mid-, and small-cap U.S. stocks in the consumer staples sector, as classified under the Global Industry Classification Standard (GICS). Please note that this index pulls from a very broad total basket of stocks, as this differs somewhat from the index used by XLY, which will be discussed in the next section.

The index is reviewed quarterly-in February, May, August and November-with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large, mid and small capitalization cutoff points are recalculated.

Here is a look at VCR's exposure breakdown:

Next, its Top 10 holdings:

Consumer Discretionary Select Sector SPDR Fund

With an inception date of 12/16/98 and AUM of $12.65 billion, XLY's history traces back to some of the earliest days of ETFs and it remains a truly venerable player in this sector. At .14%, its expense ratio is the highest in our comparison. At the same time, as evidenced by its average spread of .01%--truly impressive for a sector ETF--its liquidity and tradeability are the class of this sector.

While the other two ETFs track essentially the same index, XLY tracks the Consumer Discretionary Select Sector Index. The key difference between this index and the MSCI index used by XLY's two competitors is that this index starts with stocks in the S&P 500, as opposed to the broader market. As a result, it only contains 87 stocks as opposed to just shy of 400 in the MCSI index. As a result, XLY is more concentrated than its two competitors. Still, if you compare its Top 10 list, you will find that it is very consistent in this area. If you are looking to invest in this sector, but like the idea of sticking with large-cap stocks, this may well be the ETF for you.

Here is a look at XLY's exposure breakdown:

Next, its Top 10 holdings:

Summary and Conclusion

Finally, here is a chart of returns since 10/21/13, FDIS's inception date, for all three ETFs for your review.

FDIS Chart

FDIS data by YCharts

You will notice that, over this period, XLY has approximately a 5% greater return than FDIS and VCR, which have performed almost identically. If you were to overlay the results for Amazon.com over this same period, you would find that it is up some 163%. As a result, XLY's slightly higher weighting in Amazon.com has no doubt contributed somewhat to this outperformance.

If you believe that Amazon.com will continue to outperform the market for the foreseeable future, then perhaps XLY is your best choice from this group. Its expense ratio of .14% is not significantly higher that its competitors and it offers great tradeability. If you are interested in more diversification, then VCR would probably be my choice. However, if you are a Fidelity brokerage client, and particularly if you are looking to make regular incremental investments, FDIS might be the choice for you.

Until next time, I bid you...

Happy investing!

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.

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