When it comes to sector investing strategies, few pairings offer as stark a contrast as the consumer staples and consumer discretionary sectors.
These two segments of the market are like the yin and yang of the consumer world, each reflecting different aspects of consumer behavior and, by extension, providing different investment opportunities.
Consumer staples companies produce the “must-haves” that people continue to purchase even in economic downturns, such as groceries and basic household necessities. Notable stocks in this sector include the Procter & Gamble Co. (ticker: PG), Costco Wholesale Corp. (COST), Coca-Cola Co. (KO) and Walmart Inc. (WMT).
On the flip side, consumer discretionary items are the “nice-to-haves”: goods and services that people spend on when they have extra income, such as apparel, dining out, luxury items and entertainment. Notable stocks here include Amazon.com Inc. (AMZN), Tesla Inc. (TSLA) and Starbucks Corp. (SBUX).
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For investors, these differences affect how each sector responds to various economic environments. For example, consumer staples generally offer stable returns and are less sensitive to economic downturns. Consumers will still need to eat, clean and take care of themselves even in a recession, which often makes these stocks somewhat defensive in nature.
“Consumer staple companies are generally thought of as safer and less sensitive to market changes and changes in interest rates,” says Derek Horstmeyer, professor of finance at George Mason University School of Business. “These types of companies are those that you use whether times are good or bad.”
Consumer discretionary stocks, meanwhile, tend to be higher risk but offer the potential for higher returns. These stocks are much more sensitive to the ebbs and flows of the economy; when times are good, these companies often see increased revenue and, consequently, their stock prices can rise significantly. However, in an economic downturn, these are often the first areas where consumers cut back spending, making these stocks more cyclical or “offensive.”‘
“Consumer discretionary are more interest-rate-sensitive companies and higher risk in general,” Horstmeyer says. “These stocks have higher betas, which means more market risk, and generally do better during times of economic expansion.”
Investing in exchange-traded funds, or ETFs, that track these sectors can therefore allow for a wide range of investment strategies, from the conservative to the more aggressive. By focusing on one sector or rotating between the two, investors can play both defense and offense in their portfolios, adjusting to market conditions and consumer trends in real-time.
Here are seven consumer and retail ETFs to buy in 2023:
| ETF | Expense ratio |
| The Consumer Staples Select Sector SPDR Fund (XLP) | 0.1% |
| Vanguard Consumer Staples ETF (VDC) | 0.1% |
| The Consumer Discretionary Select Sector SPDR Fund (XLY) | 0.1% |
| Vanguard Consumer Discretionary ETF (VCR) | 0.1% |
| SPDR S&P Retail ETF (XRT) | 0.35% |
| Invesco Food & Beverage ETF (PBJ) | 0.63% |
| Tema Luxury ETF (LUX) | 0.75% |
The Consumer Staples Select Sector SPDR Fund (XLP)
“ETFs that track the consumer staples sector hold companies which produce products that are needed and bought regardless of the current economic conditions,” says Jim Penna, manager of retirement services at VectorVest. “These are everyday things like food, personal care, tobacco and other essential items — things people need on a daily basis.”
Investors looking to buy durable consumer staples stocks like Procter & Gamble, PepsiCo Inc. (PEP), Coca-Cola and Walmart can buy XLP. As one of State Street’s 11 “Select Sector” ETFs, XLP currently tracks the 37 consumer staples stocks represented in the broader S&P 500. The ETF has been in operation since December 1998 and currently charges a 0.1% expense ratio.
Vanguard Consumer Staples ETF (VDC)
To compete with State Street’s Select Sector lineup, Vanguard also offers its own series of sector-specific ETFs. For consumer staples, the firm’s flagship is VDC. This ETF tracks the Spliced U.S. Investable Market Consumer Staples 25/50 Index, which has a broader focus by also including some mid- and small-cap stocks not found in the S&P 500.
As a result, VDC is arguably more diversified, with a total of 105 holdings. Still, thanks to its market-cap-weighted nature, the ETF is very similar to XLP in terms of top holdings, with familiar names like Procter & Gamble, PepsiCo, Coca-Cola, Costco and Walmart making an appearance. In terms of fees, VDC charges a 0.1% expense ratio, identical to XLP.
The Consumer Discretionary Select Sector SPDR Fund (XLY)
“The consumer discretionary sector, on the other hand, comprises companies that produce goods and services that are not essential to everyday living — things like retail purchases, travel, home improvement, among others,” Penna says. “These are items that are more likely to be purchased when the consumer feels comfortable with the current economic condition and is more likely to spend.”
State Street’s offering here is XLY, which tracks the Consumer Discretionary Select Sector Index. Currently, this includes 52 stocks from the broader S&P 500 index classified as consumer staples, such as Amazon, Tesla, Home Depot Inc. (HD), McDonalds Corp. (MCD) and Starbucks. Like all of State Street’s Select Sector ETFs, XLY charges a 0.1% expense ratio.
Vanguard Consumer Discretionary ETF (VCR)
Investors seeking broader diversification can use VCR, which is Vanguard’s consumer discretionary ETF. By passively tracking the Consumer Discretionary Spliced Index, VCR holds some 300 large-, mid- and small-cap consumer discretionary stocks weighted by market cap, making it broader compared to XLY’s narrower range of 52 holdings, while still charging the same 0.1% expense ratio.
Still, the market-cap-weighted index methodology used by VCR ensures a similar portfolio of top holdings and near-identical historical performance. Over the trailing 10 years up to July 31, VCR has returned an annualized 13.3%, compared to XLY’s 12.7%. Given their similar historical performance and holdings, but different index, investors can potentially use VCR as a tax-loss harvesting partner for XLY.
[READ: 7 Best Consumer Staples ETFs]
SPDR S&P Retail ETF (XRT)
The consumer discretionary sector can be broken down further into numerous industry groups, such as consumer services, consumer durables and apparel, automobiles and components, and retail. Investors interested in targeting the last industry group noted can use XRT. This ETF tracks the S&P Retail Select Industry Index for a 0.35% expense ratio, making it narrower and more expensive than XLY.
XRT’s index uses a modified equal-weighted methodology, which ensures higher exposure to mid- and small-cap stocks. Notable examples indexed by XRT include Carvana Co. (CVNA), TJX Companies Inc. (TJX) and Ulta Beauty Inc. (ULTA). Another noteworthy stock held in XRT is GameStop Corp. (GME), which rocketed to fame in 2021 as a meme stock after investors on Reddit caused a short squeeze.
Invesco Food & Beverage ETF (PBJ)
Most consumer staples ETFs like XLP and VDC hold an allocation of tobacco stocks, which can be undesirable for investors who prioritize environmental, social and governance, or ESG, considerations. For an alternative, investors can buy the aptly named PBJ for exposure to consumer staples stocks that have a food and beverage focus for a 0.63% expense ratio.
This ETF tracks the Dynamic Food & Beverage Intellidex, which selects 30 U.S. food and beverage stocks after assessing their price momentum, earnings momentum, quality, management action and value. Notable names in PBJ include PepsiCo, Kroger Co. (KR), Kraft Heinz Co. (KHC), Archer-Daniels-Midland Co. (ADM) and Dole PLC (DOLE).
Tema Luxury ETF (LUX)
Investors wishing to focus on the glitz and glamour of the retail industry may find LUX to be an ideal holding. Launched in May 2023, this actively managed thematic ETF focuses on global stocks involved in luxury goods and services, ranging from automobiles, fashion, hospitality, jewelry and beauty. According to Tema, this provides strong operating margins and high returns on capital.
LUX’s portfolio currently consists of 30 holdings with a notable European focus. Notable names U.S. investors may recognize include LVMH Moet Hennessy Louis Vuitton SE (OTC: LVMUY), Hermes International SCA (RMS.PA), Mercedes-Benz Group AG (OTC: MBGAF) and Ferrari N.V. (RACE). The ETF currently charges a 0.75% expense ratio, contractually waived down from 0.9%.
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7 Best Consumer and Retail ETFs to Buy Now originally appeared on usnews.com
Update 08/30/23: This story was previously published at an earlier date and has been updated with new information.
