Investors can ride the consumer wave.
Despite talk about political risk for the markets, stocks continue to hang tough. A huge driver of the American economy -- namely, consumer spending -- remains robust in the face of uncertain headlines. Case in point: In the second quarter of 2019, real personal consumption expenditures rose at a 4.7% annual rate, the largest increase in more than four years, despite grumblings about a possible trade war with China causing a drag on the global economy. And why shouldn't consumers be confident? Unemployment is still under 4%, borrowing costs are near record lows and there's no significant sign of trouble on the horizon. Here are nine exchange traded funds for investors looking to capitalize on the persistent strength of American consumers.
Consumer Discretionary Select Sector SPDR Fund (ticker: XLY)
The largest consumer focused ETF available, XLY boasts more than $14 billion under management. It features roughly 60 of the most popular stocks in the sector, including the e-commerce icon Amazon.com (AMZN), hardware giant Home Depot (HD) and fast-food behemoth McDonald's Corp. (MCD) among its top holdings. If you're looking to play consumer behavior in a broad way, this is the go-to fund for many investors. Just be aware that it is weighted by market value, and is a bit top heavy as a result. For instance, the $900 billion Amazon represents about 20% of the entire portfolio at present.
Vanguard Consumer Discretionary ETF (VCR)
Though it's also market cap weighted and reliant on bigger stocks, the much deeper list of 300 stocks that make up VCR ETF offer a much broader lineup that includes some lesser known companies in the sector beyond the few dozen top tier stocks in the aforementioned SPDR consumer fund. So while you'll still get obvious names like Amazon, you'll also get smaller players like restaurant operator Dave & Busters Entertainment (PLAY) and shoe company Crocs (CROX). That adds a bit more variety for those looking to invest in consumer spending in a more general way.
Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
Many investors already own stakes in the biggest consumer brands either as individual stocks or as holdings of broad-based funds benchmarked to an index like the S&P 500. If you'd like to go smaller and skip some of the big guys while adding new consumer names without overlap, then consider this Invesco fund. The largest holdings you'll find are only a few billion dollars in market value, including restaurant Wingstop (WING) and auto parts player Monro (MNRO). These smaller and sometimes obscure names that round out a fund with 100 smaller consumer stocks you won't have exposure to elsewhere -- and being smaller means just a little bit of growth can go a long way to pushing these stocks higher.
iShares Global Consumer Discretionary ETF (RXI)
Another way to get true diversification across the retail space is to take a global approach. Components in RXI include Japan's Toyota Motor Corp. (TM) and French luxury conglomerate LVMH (LVMUY), which owns brands including Moet champagne and Louis Vuitton fashion items. American consumers don't just buy products from U.S. companies. And, the broader approach of this iShares fund will ensure you don't miss out on a big brand just because it happens to have a headquarters overseas. It's well known that U.S. consumers are one of the most powerful economic forces in the world and this reach benefits stocks beyond national borders.
SPDR S&P Retail ETF (XRT)
There are some investors who prefer to think "locally." But that's easier said than done, since the same global footprint of brands like Toyota and Louis Vuitton are present for U.S. based consumer powerhouses that do business in Europe, Asia and beyond. One way to get laser focused on U.S. spending trends, however, is to examine where people are shopping instead of what particular products they are buying. That's what XRT does with stocks like Target Corp. (TGT) and Costco Wholesale Corp. (COST) near the top of the list. Whether goods are made overseas or the company behind them is a multinational, domestic retail sales rely on domestic spending trends.
Amplify Online Retail ETF (IBUY)
While an approach focusing on U.S. retailers has obvious appeal, there also are drawbacks in the age of e-commerce and the decline of brick-and-mortar sales. One way around this is to stay focused on retail as a subsector of the consumer industry, but to filter out physical stores and focus more on online sales. That's precisely what this online retail ETF does. There's a big helping of names you would expect like eBay (EBAY), as well as new entrants like online car merchant Carvana Co. (CVNA) to fill out the mix.
Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)
If you'd rather not engage in picking a specific flavor, one way to reduce complexity in your consumer investments is to go with this "equal weight" fund from Invesco. The 60-plus holdings represent the most prominent consumer names, but the structure and regular rebalancing ensures no holding represents more than about 2% of the total portfolio at a given time. After all, if you want to buy Amazon.com then just buy AMZN stock -- not a consumer fund that has a large percentage of its assets tied up in this stock. If you want a broad and diversified play on the sector, RCD is it, with a methodology to ensure no single company can sway the fund too much.
Invesco DWA Consumer Cyclicals Momentum ETF (PEZ)
A very different approach from Invesco, the PEZ fund relies on momentum indicators such as relative strength to competitors in formulating its focused list of less than 40 holdings. The idea is to zero in on the stocks that are moving the most right now and ignore the rest. Such a strategy comes with risk, of course, since putting all your eggs in one basket can end badly if the market moves away from you. But the fund seems to be doing something right. Its top holding at present is auto parts merchant O'Reilly Automotive (ORLY), which is up nearly 20% in the last year versus low single-digit gains for the broader S&P 500 in the same period.
First Trust Consumer Discretionary AlphaDEX Fund (FXD)
A cousin to the momentum ETF, this First Trust fund zeroes in on more fundamental factors such as sales growth and value, such as a company's price-book value. The idea is similar, however, in that FXD looks to apply screening to the consumer sector to weed out the bad performers and zero in on the strong ones. The result is an eclectic mix that includes homebuilder PulteGroup (PHM) and mattress maker Tempur Sealy International (TPX) among its top positions. Still, with 120 holdings and no single stock representing more than about 3% of the portfolio, this ETF is still diversified enough to be a fairly wide play on the sector.
Best consumer ETFs to buy now:
-- Consumer Discretionary Select Sector SPDR Fund (XLY)
-- Vanguard Consumer Discretionary ETF (VCR)
-- Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
-- iShares Global Consumer Discretionary ETF (RXI)
-- SPDR S&P Retail ETF (XRT)
-- Amplify Online Retail ETF (IBUY)
-- Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)
-- Invesco DWA Consumer Cyclicals Momentum ETF (PEZ)
-- First Trust Consumer Discretionary AlphaDEX Fund (FXD)
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