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5 Top Consumer-Discretionary ETFs

By Dan Caplinger - Jul 15, 2017 at 7:50AM

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Find out what makes these exchange-traded funds so popular.

Consumers buy a lot of things, but it's the things they don't absolutely have to buy that go toward supporting the consumer-discretionary sector of the stock market. Some of the consumer goods that fall into the discretionary category, such as automobiles and appliances, might not sound all that discretionary to most Americans, but the companies that make them often see dramatic changes in demand that follow the ups and downs of the business cycle.

Many of these stocks have produced good returns for investors, and exchange-traded funds that invest in consumer-discretionary companies offer diversification and exposure to the sector. The following five consumer-discretionary ETFs are among the most popular, but they also take a variety of approaches toward investing in the sector.

Consumer Discretionary ETF

Assets Under Management

Expense Ratio

5-Year Average Annual Return

Consumer Discretionary Select Sector SPDR (XLY 2.82%)

$12.2 billion



Vanguard Consumer Discretionary (VCR 3.25%)

$2.2 billion



First Trust Consumer Discretionary AlphaDEX (FXD 4.18%)

$400 million



Fidelity MSCI Consumer Discretionary (FDIS 3.15%)

$302 million



iShares Global Consumer Discretionary (RXI 1.83%)

$237 million



Data source: Fund providers. * Since inception on Oct. 21, 2013.

Broad-based consumer-discretionary index funds

Three of the five ETFs that focus directly on the consumer-discretionary sector take a very broad approach toward getting exposure to the space. Although different funds track different indexes, the net result largely ends up being quite similar.

The SPDR ETF has gathered the largest amount of assets, and its portfolio, therefore, acts as a good baseline for comparison. Retail stocks make up about 40% of the portfolio, with holdings nearly evenly split between internet retailers and specialty-retail companies. Media stocks make up a quarter of the fund's assets under management, and hotels make up another 15%. Textiles and luxury goods, automobiles, and household durables like appliances, each carry about 5% exposure, with small allocations to other niche areas.

A salesman handing the keys of a new car to a customer.

Automobiles are a key consumer discretionary offering. Image source: Getty Images.

The Vanguard ETF has a similar allocation, but the fund breaks out subcategories differently. Internet retail gets a fifth of the portfolio's assets, with cable and satellite providers, restaurants, and movies and entertainment having 10% each. Home-improvement retail makes up a big portion of the ETF's overall retail exposure, but a number of subcategories add up to a sizable total allocation to the space. The Vanguard ETF's expense ratio is slightly lower than the SPDR, but its smaller asset base arguably makes it costlier to trade for frequent traders and those who don't have brokerage accounts at Vanguard.

The Fidelity ETF is the newcomer to the space, and it has the lowest expense ratio. Subindustry allocations are almost identical to the SPDR ETF, with just a bit more exposure to the automaker and automobile-component space.

A different approach

The First Trust ETF uses a different method of investing in consumer-discretionary stocks. The fund ranks stocks in the Russell 1000 index of large-cap companies on growth factors, including recent stock-price appreciation, one-year sales growth, and sales-to-price ratios. It also looks at value factors such as price-to-book and price-to-cash flow metrics, as well as return on assets. The rankings are used to eliminate the worst 25% of performers, and then to weight the remaining stocks, ensuring that the ETF gets more exposure to the best stocks in the index.

For all the value the approach attempts to add, the First Trust ETF has underperformed its peers, and the primary reason is that it doesn't have nearly as much of its assets invested in the leading online retail stock as other consumer discretionary ETFs. Given how well the e-commerce leader has done, that underweighting has cost the First Trust ETF dearly, and it will take a reversal of fortune in the biggest holdings of the other ETFs to allow it to catch up.

Looking beyond the U.S.

Meanwhile, the iShares ETF takes a more global approach toward consumer-discretionary stocks. About 60% of the fund is invested in U.S. companies, but Europe represents almost 20% of the portfolio, and Japan makes up 13% more. Sector exposure has 30% of the fund invested in retailers, with 20% autos, 20% media, 15% consumer durables, and the remainder in consumer-services companies. The relative strength of the U.S. consumer market has likely contributed to the iShares ETF's underperformance, but prospects for consumer growth in other parts of the globe could help the fund turn the tables in the years to come.

Which consumer discretionary ETF is best for you?

The ETFs that fit best in your portfolio depends on your particular goals and needs. All of them have interesting aspects. If you believe that the consumer economy has the potential to keep gaining ground over time, then investing in these ETFs could continue to give you solid returns and contribute toward overall growth in your portfolio.

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Stocks Mentioned

Vanguard World Fund - Vanguard Consumer Discretionary ETF Stock Quote
Vanguard World Fund - Vanguard Consumer Discretionary ETF
$236.38 (3.25%) $7.44
The Select Sector SPDR Trust - The Consumer Discretionary Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Consumer Discretionary Select Sector SPDR Fund
$141.71 (2.82%) $3.89
First Trust Exchange-Traded AlphaDEX Fund - First Trust Consumer Discretionary AlphaDEX Fund Stock Quote
First Trust Exchange-Traded AlphaDEX Fund - First Trust Consumer Discretionary AlphaDEX Fund
$47.68 (4.18%) $1.92
Fidelity Covington Trust - Fidelity MSCI Consumer Discretionary Index ETF Stock Quote
Fidelity Covington Trust - Fidelity MSCI Consumer Discretionary Index ETF
$61.18 (3.15%) $1.87
iShares Trust - iShares Global Consumer Discretionary ETF Stock Quote
iShares Trust - iShares Global Consumer Discretionary ETF
$128.77 (1.83%) $2.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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