Consumer Discretionary Sector Evolution
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ValuEngine.comConsumer Discretionary Sector Evolution
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ValuEngine.comEvolution of GICS Consumer Discretionary Sector and XLY ETF
The Consumer Discretionary sector of the Global Industry Classification Standard
(GICS) was established in 1999 to represent cyclical industries. It has undergone
several significant revisions to reflect the evolution of the global economy, primarily in
2018 and 2023, as business models shifted.
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When GICS was launched in 1999 by MSCI and S&P, the Consumer Discretionary
sector was defined to include companies that sell goods and services considered
non-essential and sensitive to economic cycles. Prior to GICS, institutions had usually
referred to this sector as Consumer Durables and Consumer Non Durables. Its
manufacturing segment included automobiles, household durable goods, leisure
equipment, and apparel, while the service segment included media, hotels, and
restaurants.
In 2018 and driven by institutional pressure against so much weight of the S&P 500
being in the information technology sector, many companies and industry groups were
reclassified. On a net basis, the single largest change affecting the Consumer
Discretionary sector was the absorption caused by the migration of e-commerce
companies such as Ebay (EBAY) and Alibaba (BABA) that moved from Information
Technology into Consumer Discretionary . A counter reduction of the Consumer
Discretionary sector’s weight occurred when Media Industry companies were moved
into the newly renamed Communication Services Sector (formerly
Telecommunications). The new Communication Services sector’s subsequent
quadrupling of weight, however, had little to do with these media companies; it was due
to the absorption of e-communications companies such as Facebook (Now META),
Alphabet (GOOG), and Netflix (NFLX).
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In 2023, more GICS reclassifications further changed the nature of the constitution of
the Consumer Discrestionary sector. The most important change was the loss of
retailers, which generated most of their revenues from consumer staples products.
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Thus, companies such as Target and Dollar General were moved to Consumer Staples.
Counterbalancing this somewhat was another infusion from the Information Technology
Sector. Companies focused on travel-related data joined the Consumer Discretionary
Sector.
This history is to provide context for something we did not expect to see in checking out
the year-to-date returns at the beginning of this year. The Select Sector SPDR ETF
representing Consumer Nondurables, XLP, the most noncyclical of the 11 GICS, was
the worst performing sector over the past 12 months, with a gain of just 1.7%. That
made sense in a predominantly “risk-on” market. The least volatile stocks are used as
sources of funds for the most volatile stocks. Historically, the most volatile stocks were
stocks that moved up and down the most with economic GDP cycles, hence Consumer
Cyclicals. Ostensibly, the ETF now representing that sector is XLY, the Select Sector
SPDR Consumer Discretionary ETF.
When the Select Sector SPDRs were first introduced around the turn of the century, one
of the most frequent hedge fund risk-on vs. risk-off trades involved XLP and XLY. When
the economy was expected to weaken and turn toward recession, the risk-off trade was
long XLP and short XLY. Conversely, when the economy looked like it was starting to
recover (e.g., March 2003; March 2009), the risk-on trade was long XLY and short XLP.
In this strongly risk-on year, where the SPDR S&P 500 Portfolio ETF (SPLG) has risen
17.1%, XLP’s last-place performance is precisely what we expected. However, XLY’s
gain is a mere 7.6%, less than half of that of SPLG. Therefore, the changes in the
underlying constitution of the Consumer Discretionary apparently means that it is no
longer the cyclical opposite of the Consumer Staples Sector. Yet, in emulating market
price movements using the classical 3-year weekly-moving-average Beta, they should
behave as opposites with XLY having the second highest Beta of 1.13 while XLP has
the second lowest Beta of 0.61. To clarify the above, this table displays the aggregate
year-to-date returns of the 11 Select Sector SPDRs. It is very surprising that despite
being led by Amazon (AMZN) and Tesla (TSLA), XLY has not ridden this phase of a
rising GDP cycle as well as XLU or XLI, generally not considered as closely tied to
economic growth.
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Symbol Sector Name Year-to-Date
(YTD) Return
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XLK Technology 29.92%
XLC Communicatio 23.42%
n Services
XLU Utilities 20.18%
XLI Industrials 17.70%
XLF Financials 12.67%
XLB Materials 8.14%
XLY Consumer 7.56%
Discretionary
XLE Energy 6.89%
XLRE Real Estate 6.04%
XLV Health Care 2.57%
XLP Consumer 1.67%
Staples
With this as background, we turn our “sector spotlight” to Consumer Discretionary this
week. According to [Link], there are currently 13 broad Consumer Discretionary
ETFs and three are leveraged. While leveraged ETFs may be useful tools for hedge
funds, this blog discards them when it comes to comparing and analyzing sector ETFs.
This leaves us with 10 ETFs that focus on the broad sector, as seen here.
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YTD
Assets 1 Month Price 3 Year Yield P/E # of
Ticker Name (Billions) Returns Change Returns ER % Ratio Holdings
Consumer
Discretionary
Select Sector
XLY SPDR Fund 24.54 -2.91% 4.88% 18.30% 0.08% 0.8% 29.1 52
Vanguard
Consumer
Discretionary
VCR ETF 6.38 -3.52% 3.25% 17.79% 0.09% 0.7% 29.4 293
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Fidelity MSCI
Consumer
Discretionary
FDIS Index ETF 1.93 -3.44% 3.32% 17.83% 0.08% 0.8% 26.0 254
First Trust
Consumer
Discretionary
FXD AlphaDEX Fund 0.31 -4.63% 2.34% 12.06% 0.61% 0.9% 17.7 120
Invesco S&P
500 Equal
Weight
Consumer
Discretionary
RSPD ETF 0.22 -4.74% 4.07% 13.62% 0.40% 0.7% 22.0 51
Invesco Dorsey
Wright
Consumer
Cyclicals
PEZ Momentum ETF 0.05 -3.87% -1.20% 14.51% 0.60% 0.1% 27.2 41
iShares U.S.
Consumer
IEDI Focused ETF 0.03 -4.23% 2.01% 15.01% 0.18% 0.9% 28.6 186
Invesco S&P
SmallCap
Consumer
Discretionary
PSCD ETF 0.02 -7.90% -4.46% 10.04% 0.29% 0.9% 13.3 86
AdvisorShares
VICE Vice ETF 0.01 -10.42% 2.38% 8.01% 0.99% 1.4% N/A 26
AdvisorShares
BEDZ Hotel ETF 0.01 -6.43% -3.41% 12.07% 0.99% 0.0% N/A 26
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The above table shows clearly that XLY is the proverbial 500-pound gorilla in assets
under management (“AUM”) of this sector and with good reason. It has continuously
outperformed the other nine ETFs in this sector while being tied for the lowest fee. Most
of the other ETFs are broader with lower average market caps and considerably more
stocks. Those that are not broader attempt to add value via smart beta techniques such
as equal or fundamental or “smart beta’ weighting schemes. The purpose of “smart
beta” is to use “time-tested” methods of outperforming market-cap weighted index
returns, referred to by smart beta proponents as “dumb beta.” Almost immediately after
ETFs tied to such schemes gained popularity beginning in the late in the first decade of
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this century, mega-cap stocks that make up the market’s leadership began
outperforming other weighting schemes consistently between 2009 and 2025.
Fund-flow data shows that during this decade thus far, alternatively weighted and
broader sector ETFs have been eclipsed in returns by the market-cap-weighted
Select Sector SPDR in nearly every market sector. Therefore, it may not come as a
surprise that ValuEngine forecast model rates XLY a 4 (Buy) and all the other ETFs that
we rate in the table are 3 (Hold). Perhaps, at least since 2009, market-cap-weighting
isn’t such a dumb idea after all.
Turning the focus to the top 10 stocks in XLY, all are rated at least 3 (Hold) but four are
ranked 4 (Buy) or 5 (Strong Buy) by our predictive model. The former group includes
Amazon, Tesla, and Booking Holdings (BKNG). The Strong Buy stock is Doordash
(DASH). There are actually several other stocks in the sector that ValuEngine rates 5
and are also ranked as undervalued by our proprietary valuation model. This group
includes: Wayfair (W); Roku (ROKU); BiliBili (BILI); Corsair Gaming (CRSR); Melco
Resorts (MLCO); and Paramount Skydance (PSKY). One stock undervalued more
than 40% and also ranked a 4 according to our models is American Sports (AS).
Overall, 46 of the 242 companies ValuEngine covers and classifies as in the sector are
rated either 4 or 5. This provides investors with many choices within Consumer
Durables.
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The bottom line is that this XLY is an attractive sector ETF with many choices ranked at
least hold and quite a few ranked 4 or 5. Beyond XLY, it seems more attractive to hunt
for individual stocks in the sector that are not in the S&P 500 index than to invest in the
broader or differently weighted ETFs in the sector. There are many choices available
with more stocks that are rated either 4 or 5 and also undervalued compared to most
other sectors. The warning here is that if or when the market starts repositioning itself
for an expected recession, then stocks in the consumer durables sector will be among
the first casualties to be sold. Until then, this continues to appear to be fertile ground.
________________________________________________________________
_____
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc ( [Link] )
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support@[Link] (321) 325-0519
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