7 Best Consumer Discretionary Stocks and ETFs to Buy

Here are some of the top ways to bet on the consumer discretionary sector.

Consumer discretionary stocks hail from one of the most sensitive, boom-or-bust sectors in the overall market. Due to the nonessential nature of their products and services (think appliances, vehicles, jewelry, cruises, hotels and more), demand tends to ebb and flow based on the current economic cycle. During times of economic expansion, consumers often use cheap credit to ramp up purchases, which can help consumer discretionary companies grow faster than average. During times of economic contraction, consumers are likely to curtail or delay spending, which can severely hurt the revenue and earnings of consumer discretionary companies. Still, the potential for higher-than-average returns makes them an attractive bet for risk-tolerant investors. For those looking for exposure, here are seven consumer discretionary stocks and exchange-traded funds, or ETFs, to buy.

Starbucks Corp. (ticker: SBUX)

America’s favorite coffee chain dominates street corners, with over 24,000 corporate and franchisee stores around the world. Far from being a simple coffee store, Starbucks has diversified in recent years across many different brands, including Teavana, Tazo, Evolution Fresh and La Boulange. The company has introduced numerous processes designed to streamline efficiency, including mobile ordering, customer rewards, e-payment platforms and even delivering services via partnerships. Recently, the company outlined a three-year recovery plan to help it bounce back after COVID-19 hit sales hard. This includes a greater focus on drive-thru stores, opening smaller, boutique locations outside densely populated urban centers and a renewed drive to capture the Chinese market. Like most consumer discretionary stocks, Starbucks is down heavily year to date through Sept. 27, posting a 26.6% loss compared to the 23.5% decline suffered by the S&P 500.

Nike Inc. (NKE)

Nike went from a small-but-successful shoe retailer to a global apparel titan thanks to its high-profile partnerships with many celebrity athletes, with names such as Michael Jordan, LeBron James, Cristiano Ronaldo and Tiger Woods endorsing its extensive line of products. The company reports earnings Sept. 29. Due to the impact of COVID-19 lockdowns on retail shopping and supply chain issues on Nike’s product availability, analysts are expecting earnings per share of 92 cents, a steep decline from a year before. This reflects the market’s worries about Nike’s deteriorating margins, due to heavy markdowns implemented to reduce overstocked and unsold inventory. Still, Nike may benefit from future tail winds as the back-to-school shopping season continues. The stock is down heavily year to date with a 41.8% loss.

Home Depot Inc. (HD)

Most U.S. homeowners are very familiar with the Home Depot. Those looking to renovate their homes shop at the company’s warehouse-like stores, which stock everything from building materials and home improvement products to lawn and garden products, tools, and equipment. The store is frequented by professionals, too, with electricians, plumbers, painters and others relying on Home Depot’s extensive inventory and expertise. One thing to watch in the coming months? The company’s first storewide unionization effort, in which 274 employees in Philadelphia are filing to form a collective bargaining unit. Workers cited discontent over inadequate pay and poor working conditions as the driver behind unionization efforts. Year to date, Home Depot is down 34%.

Consumer Discretionary Select Sector SPDR Fund (XLY)

Investors seeking greater diversification can buy an ETF that holds a basket of numerous consumer discretionary stocks. A great pick here is XLY, which tracks the Consumer Discretionary Select Sector Index. This is a market-capitalization-weighted index of 56 consumer discretionary companies represented in the S&P 500. Much of the ETF is concentrated in large-cap stocks, with top holdings including Tesla Inc. (TSLA), Amazon Inc. (AMZN), McDonald’s Corp. (MCD), Home Depot and Nike. In terms of industry representation, 25.9% of the ETF is in automobiles, 23.2% is in internet and direct marketing retail, and 12.1% is in hotels and restaurants. XLY has an expense ratio of 0.1%, which works out to about $10 in annual fees for a $10,000 investment.

Vanguard Consumer Discretionary ETF (VCR)

Investors looking for greater diversification when it comes to consumer discretionary stocks might not like XLY, given that the ETF only tracks companies held in the S&P 500. A broader ETF to buy here is VCR, which tracks the Consumer Discretionary Spliced Index. VCR holds 311 U.S. consumer discretionary stocks, most of which are large caps, but with some mid-cap representation as well. Although its top five holdings still match those seen in XLY, VCR assigns less weight to them given its increased number of holdings. Still, the two ETFs are very similar despite tracking different indexes. This makes VCR a good possible tax-loss harvesting partner for XLY. VCR also costs an expense ratio of 0.1%.

Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)

ETFs like XLY and VCR are market-cap-weighted, meaning that large-cap consumer discretionary stocks like Tesla and Amazon are held in higher proportion compared to smaller stocks. This approach can lead to concentration risk, where the ETF’s performance is swayed by the presence of a few large-cap stocks. To remedy this, investors can buy RCD for a more balanced approach. RCD opts for an equal-weighting approach between 57 holdings, where large-cap stocks like Starbucks are held in the same proportions as smaller ones like O’Reilly Automotive Inc. (ORLY), at 1.9% each. The downside of this approach is a higher fund turnover, which causes the ETF to incur a higher expense ratio of 0.4%.

Direxion Daily Consumer Discretionary Bull 3X Shares (WANT)

For a high-risk, high-reward play, investors can buy WANT, a leveraged ETF. WANT provides 3 times daily exposure to the returns of the Consumer Discretionary Select Sector Index, the same one tracked by XLY. This means that gains and losses in the underlying index’s daily returns are tripled in either direction — a 1% gain becomes a 3% gain, and a 1% loss becomes a 3% loss. However, the target 3 times leverage is only accurate for a day. If held longer, WANT’s performance can stray significantly from the 3x target due to compounding and volatility drag. As such, WANT is intended to be a short-term trading instrument. The ETF costs a high expense ratio of 0.97%.

7 best consumer discretionary stocks and ETFs to buy:

— Starbucks Corp. (SBUX)

— Nike Inc. (NKE)

— Home Depot Inc. (HD)

— Consumer Discretionary Select Sector SPDR Fund (XLY)

— Vanguard Consumer Discretionary ETF (VCR)

— Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)

— Direxion Daily Consumer Discretionary Bull 3X Shares (WANT)

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7 Best Consumer Discretionary Stocks and ETFs to Buy originally appeared on usnews.com

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