The United States is home to one of the largest consumer markets in the world, which is well known. However, understanding the different categories of where and why consumers are spending and how to capture that in an investment is key for advisors and investors when considering how to utilize retail into a diversified portfolio.
The Consumer Discretionary Fund (XLY) offers the opportunity to capture a segment of the retail market, focusing on what might be considered the higher end, including services beyond goods, concert tickets, and vacations. Another way to think of it is buying goods and services using disposable income.
XLY is a portfolio of U.S. large-cap consumer discretionary stocks. XLY's basket of stocks represents the sector well when looking at the names. The fund has 53 holdings in total. The top holding at 22.97% is the juggernaut retailer Amazon, followed by Tesla (19.41%), Home Depot (4.44%), McDonalds (4.43%) and Nike (4.25%)*.
The other names in the top 10 are Lowes, Starbucks, Booking Holdings, TJX, and Ford.
Higher End vs Low-Cost Retail
The theme is a contrast to consumer spending on goods such as food, soap, toothpaste, and tobacco products, or low-cost goods that are typically used on a daily basis. But with low-cost goods also comes low profit margins, and it is important for investors to understand that as well.
Because Tesla and Nike sell high-priced goods, the opportunity for higher profit margins looms, particularly in an economy when spending is much more liberal than in a down economy. Even in a down economy, Nike has been established as a staple in culture and fashion, and sales are consistent through good and bad economies alike.
The Consumer Discretionary Select Sector SPDR fund, XLY, offers a way to tap in the broad high-end retail market in an easy and inexpensive manner. The fund has attracted over $17 billion in assets under management since its inception in 1998. XLY has proven tradability and has stood the test of time as far as ETFs go. The fund also comes with an investor-friendly expense ratio of 0.10%**.
Spending on apparel, electronics, travel, dining out, vacations, video games, toys, and entertainment are considered discretionary. And using a broad market index approach to this retail sector allows investors to play the field rather than trying to pick a winner in the high-end retail market. XLY opens the door for investors to this opportunity.
DISCLAIMER: This is a work of research and should not be taken as investment or financial advice. Therefore, Select Sector SPDRs or the publisher is not liable for any decision made based on the publication.
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*Holdings, Weightings & Assets as of 6/30/23 subject to change
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The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market. The index is heavily weighted toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The S&P 500 Index figures do not reflect any fees, expenses or taxes. An investor should consider investment objectives, risks, fees and expenses before investing.
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*Dan Dolan is a Registered Representative of ALPS Portfolio Solutions Distributor, Inc. ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is the distributor for the Select Sector SPDR Trust.
SEL006691 EXP 9/30/23
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