The cyclical spending outlook looks bright this summer.
Many Americans are eager to return to the old way of doing things from before the pandemic — big things like resuming summer vacations and little things like spontaneous trips to the mall or a favorite restaurant. With more than 100 million Americans now fully vaccinated against the coronavirus, it appears we could be on the cusp of some kind of return to normal economic activity. That’s music to the ears of investors in cyclical stocks, who took a big hit when spending dried up last year but are now poised to ride a potential recovery to success. If you’re interested in cyclical plays this summer, consider these diversified consumer exchange-traded funds.
Consumer Discretionary Select Sector SPDR Fund (ticker: XLY)
This consumer cyclical ETF from State Street Global Advisors is the largest discretionary-focused fund on Wall Street with more than $20 billion in assets under management. The fund is weighted by market capitalization, however, so two current holdings in Amazon.com (AMZN) and Tesla (TSLA) represent more than one-third of the portfolio all by themselves. Counting other big names such as restaurant chain McDonald’s Corp. (MCD) and home improvement company Home Depot (HD), the top 10 positions represent about 69% of the total assets under management despite having more than 60 total holdings. Though it’s top-heavy, the fund undeniably represents the biggest consumer names out there — so it appears its makeup isn’t too much of a turnoff for some investors.
Vanguard Consumer Discretionary ETF (VCR)
With nearly 300 total positions, this Vanguard fund is a bit more diversified than the prior offering. The important phrase here is “a bit” because despite having roughly five times the total components, this consumer cyclical ETF is also weighted by market cap and a similar list of big companies make up the top holdings. Still, only a bit more than half of assets are in the top 10 positions this time to give a less focused approach to the sector — and with a smattering of smaller stocks like Ollie’s Bargain Outlet (OLLI), investors still will have a diversified outlook toward U.S. spending trends beyond the most obvious investments.
Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)
If you don’t like either of these first approaches, then consider this “equal weight” fund that is comprised of about 60 total holdings, but no single position represents more than about 1.9% of the entire fund at present. That’s because of a strategy that regularly balances each stock to a roughly similar portion of this consumer ETF to provide a smoother and less volatile approach to the sector. Of course, that means since you have an equal stake in more modest stocks such as appliance manufacturer Whirlpool Corp. (WHR) and homebuilder D.R. Horton (DHI), you may not see as much upside if one of the megastocks like Amazon goes on a tear. That said, over the long run, this diversified approach may provide more consistent returns as well as peace of mind.
SPDR S&P Homebuilders ETF (XHB)
Speaking of D.R. Horton, it’s undeniable that housing is one of the focused areas within consumer cyclical investments that has a big appeal to certain traders. Housing involves a big expense, and because it’s tied to real estate, there are some who believe there is a bit more stability or inherent value in homes over other assets. With $2 billion in assets under management, XHB is a widely held fund that offers exposure to the biggest housing stocks in the U.S. — including builders like PulteGroup (PHM), as well as home improvement giant Lowe’s Cos. (LOW) and furnishing stocks like Williams-Sonoma (WSM). As home prices continue to go up, XHB has all of the related plays covered.
iShares U.S. Consumer Services ETF (IYC)
Far less tangible than real estate and home goods are consumer services. However, this is another discretionary category that is incredibly important to investors and the most likely to see an uptrend when Americans begin opening their wallets more. Think streaming video giant Netflix (NFLX) and Walt Disney Co. (DIS) that provide entertainment, or restaurants like Starbucks Corp. (SBUX) and Chipotle Mexican Grill (CMG). With more than 130 holdings, IYC gives investors a direct play into the U.S. service economy, which could be a very good place to be if current opening trends continue, thanks to vaccine rollouts.
SPDR S&P Retail ETF (XRT)
Another important subsector of the consumer discretionary ecosystem is retail. In fact, many investors think of spending at mall-based apparel brands like American Eagle Outfitters (AEO) and department store Dillard’s (DDS) even in a digital age. This retail ETF is another equal-weight fund that rebalances regularly to avoid big names dominating the list, instead providing a broad look at all retail sales across various specialty channels from auto parts to home goods to clothing. If you want to play an uptick in cyclical spending, this is a great one-stop ETF to do so.
Amplify Online Retail ETF (IBUY)
Of course, there’s obvious appeal to going with digital natives instead of traditional retail names — particularly after many consumers have gotten used to ordering online during the pandemic. This $1.5 billion Amplify ETF allows you to play consumer discretionary spending specifically with businesses that do more than half of their transactions over the internet. The fund’s portfolio includes familiar e-commerce names such as Groupon (GRPN) and Expedia Group (EXPE) but also lesser-known names like Gen Z clothing merchant Revolve Group (RVLV). It all adds up to a strong digital footprint to capitalize on cyclical spending trends.
Seven consumer cyclical ETFs to buy now:
— Consumer Discretionary Select Sector SPDR Fund (XLY)
— Vanguard Consumer Discretionary ETF (VCR)
— Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)
— SPDR S&P Homebuilders ETF (XHB)
— iShares U.S. Consumer Services ETF (IYC)
— SPDR S&P Retail ETF (XRT)
— Amplify Online Retail ETF (IBUY)
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