Beyond XLY: Three Pure Play Consumer Discretionary ETFs

by on February 2, 2010 | ETFs Mentioned:

Through the eyes of an investors, the consumer sector of the global economy is generally split into two segments: consumer staples and consumer discretionaries. Consumer staples stocks generally include those that manufacture and sell goods that are vital components of most household budgets, such as food and non-durable household goods.  Companies producing goods that are deemed to be more of a luxury spend are classified as consumer discretionary stocks.

XLY Top Ten Holdings
McDonalds 7.3%
Walt Disney 6.1%
Home Depot 5.1%
Comcast 4.9% 4.5%
Target 4.2%
Ford Motor Company 3.9%
Time Warner 3.5%
Lowe’s 3.4%
DirecTV 3.1%
Total Top 10 46.0%

Historically, investors looking for low beta have gravitated towards consumer staples, while those looking to make a leveraged play on the health of the broad overall economy have embraced the consumer discretionary sector. The Consumer Staples Select Sector SPDR Fund (XLY) has a beta of 1.11 relative to the S&P 500, compared to only 0.49 for the Consumer Staples SPDR (XLP).

ETFs have become a popular way for investors to play these industries, with a handful of funds offering indexed variations to the consumer sector. But many investors making a play on the consumer discretionary sector through ETFs are surprised at what they’re buying into. Those expecting exposure to makers of luxury goods and services are surprised to see big weightings to companies like McDonald’s, Home Depot, Kohl’s, and Staples–not exactly vendors that come to mind when considering discretionary expenses.

The issue isn’t a matter of impropriety on the part of ETF issuers, but rather a disconnect between investor expectations and reality. Many companies that sell staple-like goods and services (such as Target, Lowe’s, and News Corporation) are indeed classified as consumer discretionary companies, despite the fact that they sell products and services that are staples of many U.S. households.

But these general sector funds aren’t the only way to bet on an increase in discretionary spending. For investors looking to gain more “pure play” exposure to the consumer discretionary sector, the best options likely aren’t XLY or the iShares S&P Global Consumer Discretionary Index Fund (RXI). Below, we profile three ETFs that invest in companies whose profitability often hinges of discretionary spending levels in the economy. For more actionable ETF investment ideas, sign up for our free ETF newsletter.

  • Claymore/Robb Report Global Luxury Index ETF (ROB): This ETF is based on the Robb Report Global Luxury Index, a benchmark consisting of global companies engaged in the provision of luxury goods and services. Component companies may include retailers and manufacturers of automobiles, boats, and electronics, clothing and accessories. Currently components of ROB include Swatch (5.7%), Christian Dior (4.7%), Coach (4.7%), and Ralph Lauren (4.5%). When most investors envision discretionary items, it is designer clothing and timepieces that come to mind, not Big Macs. This ETF maintains a global focus, with nearly three-quarters of its holdings outside the U.S.


  • Market Vectors Gaming ETF (BJK): This ETF is linked to the S-Network Global Gaming Index, a benchmark composed of companies that generate at least 50% of their revenues from the gaming industry. Gambling is among the most discretionary of all consumer spending, as consumers will be spending on clothes long before they’re spending on craps. This ETF saw prices sink during the most recent recession, as trips to Vegas were among the first expenses to be cut from the budget. ROB has a significant allocation to casinos and resorts, race and sports books, and horse racing stocks, but also invests in stocks of online gaming and gaming technology companies, such as International Game Technology.


  • Claymore/NYSE Arca Airline ETF (FAA): This ETF offers exposure to the global airline industry, offering exposure to a sector that depends heavily on overall economic health. While consumer travel accounts for a significant portion of industry revenue, airlines depend on discretionary spending from businesses to drive the most profitable traffic. If business travel picks up in coming months, FAA could be one of the biggest beneficiaries. On the other hand, a prolonged downturn could further cripple an already-battered industry. It should be noted that FAA is among the most concentrated ETFs available: about half of total assets are split between Delta, Southwest, and AMR Corp.


Disclosure: No positions at time of writing.