Consumer discretionary ETFs have the potential to play a key role in helping investors develop investment portfolios that include a broad range of exposure to different asset classes.
Consumer discretionary ETFs provide investors with the chance to obtain exposure to a wide variety of shares that are included in a certain index or sector.
ETFs are similar to other types of assets in that certain ETFs have superior features over those of other ETFs.
This article takes a look at some of the best consumer discretionary ETFs for long-term investors.
Companies that produce items and services that consumers view to be non-essential or optional, as opposed to essential or vital, make up the consumer discretionary sector of the economy.
It should not come as a surprise that the industry as a whole demonstrated dismal performance throughout the year 2022.
Consumers went through a large amount of financial stress as a result of a combination of factors, including a significant increase in interest rates and a persistent inflation rate that reached its highest level in the last forty years.
People who had some discretionary income tended to shift their spending priorities away from acquiring material goods and toward engaging in activities that provided them with an experience, with a particular emphasis placed on vacations.
There has been and will continue to be a healthy demand for travel over the first few months of the year 2023.
Despite this, it is still difficult to predict what the future holds for consumer discretionary equities.
The rate at which and the direction in which these economic indicators are moving are two of the factors that will surely play a role in determining the future course of inflation and interest rates, as well as the resiliency of the American consumer.
On the other hand, there are other market watchers who believe that the prices of certain stocks that are part of this particular industry’s stock market are currently undervalued.
Individuals have the opportunity to invest in a consumer discretionary ETF that is highly rated, which allows them to strategically position themselves to gain on the sector’s ongoing expansion over an extended period of time.
This is preferable to selecting individual stocks.
If you want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.
What is Consumer Discretionary
The term “consumer discretionary” refers to products and services that are considered by consumers to be non-essential, but which they may find appealing if they have enough disposable income to acquire them.
The term “consumer discretionary items and services” refers to a wide variety of products and services, including automobiles, long-lasting consumer goods, luxury fashion, various entertainment options, and leisure activities.
In the context of business, the companies that offer these kinds of goods and services are commonly referred to as consumer discretionaries or consumer cyclicals.
The manufacture of goods for the discretionary spending of consumers is the focus of the businesses that make up the consumer discretionary sector of the economy.
This sector includes a variety of different industries.
The acquisition of consumer discretionary equities, participation in mutual funds and ETFs, and participation in ETFs are all viable options for investors who want to concentrate their investment efforts in this particular sector.
How Consumer Discretionary Works
Purchasing consumer discretionary goods is frequently contrasted with purchasing consumer necessities. Both the categories of the products and the products themselves are susceptible to the impact of economic cycles.
Consumers typically see a gain in their income during times of economic expansion, and as a result, they devote a bigger proportion of their newfound wealth to the acquisition of goods and services that fall under the category of “discretionary consumer goods.”
In contrast, when the economy is contracting, individuals often see a decline in their income and have a higher tendency to direct a bigger proportion of their spending toward essential products and services.
These items are generally referred to as consumer staples, however, another term for them is consumer defensive.
Earnings potential and consumer spending are two aspects of an economy that are significantly influenced by the phases of the economic cycle.
The business cycle can be broken down into four separate stages. The terms expansion, peak, contraction, and trough are often used to refer to the four stages that make up the business cycle.
An expanding economy that has reached its peak is often characterized by increased profitability for businesses of all sizes as well as increased profitability for individual consumers.
This is consistent with the rise in total expenditures. In most cases, the reverse occurs in an economy that is going through a contraction, which can be described as going from its peak to its trough.
This suggests a decline in profits as well as a reduction in the amount of money spent.
In the context of an expanding economy, it is generally predicted that consumers will possess increased disposable income, which will allow them to allot a higher amount of their financial resources toward discretionary expenditures.
In other words, they will be able to spend more money on things that they want to buy. When individuals have built up financial reserves to withstand difficult conditions, they will experience lower levels of worry.
As a direct result of this, there is a rise in demand for products that fall under the category of consumer discretionary goods.
People have a tendency, when the economy is in a challenging climate or when the economy is in a downturn, to prioritize increasing the amount of money they have saved over purchasing non-essential consumer discretionary things.
Despite this, these people will still need to make purchases of consumer staples, which are fundamental and essential items for the home and include things like toilet paper, paper towels, food, beverages, and gasoline.
What are the Best Consumer Discretionary ETFs
Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
Throughout the course of market history, it has been noted that during moments of bear-market reversals, small-cap companies have a tendency to demonstrate greater performance when compared to the performance of the whole market.
It is not possible to claim with absolute certainty that the end of this bear market is just around the corner.
However, following its conclusion, it is likely that small-cap companies will emerge as the frontrunners in the competition.
The significance of the Invesco S&P SmallCap Consumer Discretionary ETF (NASDAQ:PSCD), which is featured in this selection of the best consumer discretionary exchange-traded funds, is one of the most important justifications for its inclusion.
The objective of the investment vehicle is to provide results that are identical to those of the S&P SmallCap 600 Capped Consumer Discretionary Index.
The PSCD investment portfolio includes 86 different equities in total. Because of the fund’s commitment to portfolio diversification, no single stock can account for more than 3.8% of the total value of the fund’s holdings.
This is one of the many benefits that come with purchasing this product. Due to the fact that it invests mostly in small-cap firms, the fund is subject to a relatively low level of risk as a result of its investment strategy.
The overall expense ratio of the fund is now set at 0.30%, a figure that is widely considered to be modest in comparison to the expense ratios of a great number of other funds.
At the time that this article was written, Chris Markoch did not have any holdings, either directly or indirectly, in any of the securities that are mentioned in it.
The author’s opinions are presented here, and they are consistent with the guidelines for publishing on InvestorPlace.com. These opinions can be found in the author’s bio.
Chris Markoch is a knowledgeable and skilled freelance financial copywriter who has a career that spans more than five years and includes extensive experience in market coverage.
Since the year 2019, the aforementioned individual has been providing InvestorPlace with written articles that they have contributed.
Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD)
The Roundhill BITKRAFT Esports & Digital Entertainment (NERD) company is in charge of monitoring the Roundhill BITKRAFT Esports Index.
This index is designed to evaluate the financial performance of businesses all over the world that are participating in the eSports industry.
The Exchange-Traded Fund, often known as an ETF, provides investors with the ability to get exposure to the eSports and digital entertainment industries.
Companies that publish video games, operate streaming networks, run video game tournaments and leagues, own competitive teams, and provide hardware relevant to the industry are included in this category.
The fund has a hybrid approach, allocating investments to a mix of value and growth equities, and is comprised of companies that cover the spectrum of market capitalization.
There are 32 different entities that makeup around 26% of the overall holdings, and they are all located in the United States.
The holdings are split between various developed markets throughout the world and China, which accounts for 25% of the total.
The fund’s portfolio comprises the following prominent holdings:
- Class B shares of Modern Times Group MTG AB (MTG.B:OME), a Swedish holding company involved in eSports and gaming entertainment;
- Tencent Holdings Ltd. (700:HKG), a Chinese multinational technology holding company with subsidiaries specializing in digital entertainment, e-commerce, payment systems, and other technology services; and
- Class Z sponsored ADRs of Bilibili Inc. (BILI), a Chinese provider of online entertainment services.
Fidelity MSCI Consumer Discretionary Index ETF (FDIS)
The term “equilibrium” is one that is appropriate to use when attempting to explain the Fidelity MSCI Consumer Discretionary Index ETF (NYSEARCA:FDIS).
At the moment, the investment vehicle boasts an impressive portfolio that consists of 311 holdings. The fund’s holdings are diverse, including not only large-cap equities but also mid-cap and small-cap firms in addition to large-cap equities.
In a manner analogous to that of the XLY, Amazon is the largest holding in the FDIS, accounting for more than 25% of the total assets of the fund.
The fund, which at the moment is responsible for managing assets worth little more than one billion dollars.
The performance of the MSCI USA IMI Consumer Discretionary Index is intended to be replicated by the investment vehicle that is the subject of this discussion.
In addition, it is important to note that the presence of FDIS stock in the list of the top consumer discretionary ETFs can be supported by the fund’s net expense ratio, which is 0.8%.
This is something that should be taken into consideration. This suggests that if one has accumulated long-term gains, one will have the ability to keep a larger percentage of those gains for themselves.
ProShares Online Retail ETF (ONLN)
The objective of the ProShares Online Retail Exchange Traded Fund, or ONLN, is to mimic the performance of the ProShares Online Retail Index.
This index is a measurement of the financial performance of retailers who primarily participate in online sales or who utilize other non-store distribution methods.
The index focuses its attention mostly on developed markets; around 74% of its 26 holdings are located in the United States, while China is responsible for 21% of the index’s holdings.
The ETF directs its investments toward businesses that exhibit multi-cap growth characteristics. More specifically, the ETF prioritizes investments in companies that are active in the online retail sector and are actively contributing to the transformation of the retail industry.
The portfolio’s primary assets consist of the following:
- Amazon.com Inc. (AMZN), a globally operating technology corporation specializing in e-commerce, cloud computing, and digital streaming;
- Class A shares of Chewy Inc. (CHWY), an internet-based retailer specializing in pet food and related products; and
- American Depositary Receipts (ADRs) of Alibaba Group Holding Ltd. (BABA), a multinational technology enterprise headquartered in China, primarily engaged in online financial services, e-commerce, and internet content services.
Consumer Discretionary Select Sector SPDR Fund (XLY)
The S&P 500 index fell by 19% during the year 2022, which is indicative of the considerable loss in performance that the consumer discretionary sector endured.
A decline of 36% was seen in the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY), which was more than double the amount of the decline seen in the S&P 500.
This finding should not come as a surprise given the fact that, as of the end of the previous year, the fund’s three most substantial positions were comprised of Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), and Home Depot (NYSE:HD).
The price of XLY shares has increased by 9% from the beginning of the year 2023, resulting in positive growth.
This might be construed as an acknowledgement of the organization and make-up of the 56 stocks that are held within the fund.
As investors seek refuge in stable and reliable assets, numerous businesses in question are respected companies that have been around for a long time and are well-established. As a result, they have attracted greater investor interest due to the perception that they are stable and reliable.
When assessing the XLY fund, it is important to take into consideration its huge asset base of $13.9 billion, which places it among the most renowned ETFs in the financial sector.
This is an additional feature to take into consideration. It is a solid pick since it combines both the quantity of its holdings and the level of exposure it has to a group of reputable and well-established equities.
Amplify Online Retail ETF (IBUY)
The Amplify Online Retail Exchange Traded Fund, symbol IBUY, is a type of investment instrument that tries to reproduce the results of the EQM Online Retail Index.
This index was developed with the intention of providing investors with exposure to a certain group of merchants operating within the consumer discretionary sector, as well as websites specializing in travel and other online platforms.
The selection of these entities was based on the requirement that they derive at least 70 percent of their income from sources that are accessible online.
The ETF focuses mostly on developed market countries’ consumer discretionary industries, with a strong emphasis placed on multi-cap growing companies.
Around 64% of the fund’s holdings are involved in operations that are part of the traditional retail sector, 27% serve as online marketplaces, and the remaining 9% are made of businesses that are a part of the tourism industry.
The class A shares of three well-known corporations make up the portfolio of this investment vehicle. To begin, there is Stitch Fix Inc. (SFIX), which is a platform for online personal styling.
The second company is Qurate Retail Inc. (QRTEA), which is a holding company with subsidiaries engaged in the video and internet commerce industries respectively. Lastly, we have Lyft Inc. (LYFT), a business that focuses on delivering ride-hailing services to customers.
Final Thoughts
Investors looking to diversify their portfolio should consider allocating capital to a mix of asset classes, including the best consumer discretionary ETFs and best financial ETFs for growth potential, as well as the best consumer staples ETFs for stability.
For those seeking personalized wealth management, private banking services can provide tailored investment solutions, while investment funds offer a convenient way to access a broader range of opportunities in the financial markets.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
