Alexa, find me an ETF that’s nicely diversified, please.
Should you invest in the consumer discretionary sector?
Your answer to that question comes down to whether you believe an economic downturn is imminent. If so, companies producing toothpaste and other consumer staples may be better-positioned. But if not, companies that make the things consumers like to buy, but don’t necessarily need, may outperform.
As complicated as that question is, there’s another consideration that may be even more thorny. If you’re thinking of using an exchange-traded fund to trade your investment idea, grabbing exposure to a broad basket of stocks rather than just one company, you may be in for a big surprise.
That’s because among the biggest consumer discretionary ETFs, one company commands an outsize presence. Amazon.com Inc. AMZN, +0.15% makes up an “alarming” share of most of the largest consumer discretionary ETFs, according to one money manager.
There’s nothing wrong with owning Amazon stock, points out Rick Daskin, who runs his own wealth-management firm, RSD Advisors. For the year to date, shares have gained nearly 17%, which is not quite as strong as the broader benchmarks like the S&P 500 SPX, +0.02%, but many investors consider Amazon a presence unto its own, remaking industries as diverse as retail and real estate in its own image.
As Daskin points out, the concentration of Amazon stock among ETFs like the Consumer Discretionary Select Sector SPDR Fund XLY, -0.96% and a similar version from Vanguard VCR, -0.66% is “concerning from a diversification point of view. The whole point of buying an ETF is not buying one thing.”
Is there a hard-and-fast rule as to what level of concentration is too much? Not really, Daskin said, but double digits may be where it starts to get concerning. “23%, oof,” he added.
|Fund name and ticker||Amazon as percent of all holdings||Total assets under management|
|Consumer Discretionary Select Sector SPDR Fund (XLY)||21.8%||$14.3 billion|
|Vanguard Consumer Discretionary ETF (VCR)||22.9%||$3 billion|
|iShares U.S. Consumer Services ETF (IYC)||9.5%||$993 million|
|Fidelity MSCI Consumer Discretionary Index ETF (FDIS)||23.3%||$761 million|
|iShares Global Consumer Discretionary ETF (RXI)||9.3%||$221 million|
|iShares Evolved U.S. Discretionary Spending ETF (IEDI||11.4%||$9 million|
|Sources: fund web sites, FactSet|
Amazon or no, it’s also a good reminder that you should always, always read fund literature before investing. The fund manager, or index developer in the case of a passively-managed fund, may have different ideas of what stocks best express a theme than you do. And he or she obviously has no idea what other individual stocks or funds you may own.
It’s also worth keeping in mind that Amazon’s massive scale may even keep it less tethered to traditional sector outlines than older companies. After all, the company has been clear that it wants to be consumers’ first stop for groceries and diapers — and has teased, though not yet executed on, everything from banking to real estate services.
A short list of the bigger consumer discretionary ETFs and their exposure to Amazon is above. In just about every case, whether Amazon makes up 9% or 22% of the fund, it is the single biggest holding in the fund, even in the iShares Global Consumer Discretionary ETF, a fund that states it aims to provide investors a “global sector view.”