When you think fast-growing S&P 500 sectors, tech probably pops to mind. But new estimates show another sector will push it aside, perhaps prompting you to adjust your ETFs.
Analysts polled by S&P Dow Jones Indices say the consumer discretionary sector's earnings will grow by 29.1% annually over the next five years. That's the highest growth rate of any of the 11 sectors, including technology. Tech's bottom line is only seen growing 14% annually.
Part of that blistering expected growth is the result of a modernization of the sector. "Amazon.com and Tesla are disproportionately the largest companies in the sector on a market-cap weighted basis, which is how sector EPS data and most sector ETFs, are constructed," said Todd Rosenbluth, head of research at VettaFi.
Seeking Value In Consumer Discretionary
Much of the fast-growth in the consumer discretionary sector is coming from the behemoths in it.
EV maker Tesla is expected to see profit grow more than 1,000% from 2020 through projections for 2025. Tesla alone accounts for 22.5% of the sector. Amazon, too, is a big contributor. The company's weight in the sector of 22%. And analysts see its profit rising 144% by 2025 from where it was in 2020.
But the sector's growth isn't all just about those two companies. Hotelier Hilton Worldwide is the fastest expected grower of the bunch. Analysts think the company's adjusted profit per share by 2025 will be nearly 9,000% higher than it was in 2020.
Hopes are high for growth in consumer discretionary, but it's still not a large part of many people's portfolios. The sector carries just the third-largest weight in the S&P 500 at 11.8%. That's behind information technology's 27% weight and health care's 14.9% position.
Using ETFs To Bolster Your Exposure
There are ways to participate more in the growth coming for consumer discretionary stocks. Rosenbluth's top choice is the Consumer Discretionary Select Sector SPDR. The $14.7 billion-in-assets ETF tracks the nearly 60 stocks in the S&P 500 consumer discretionary sector. The ETF only charges an annual fee of 0.1%. It "is a strong ETF based on its exposure to large cap stocks for a low fee," Rosenbluth said.
Another option, Rosenbluth says, is the Vanguard Consumer Discretionary ETF. This $4 billion-in-assets fund doesn't just hold the large-cap consumer discretionary stocks, but adds in midsize and small ones, too. The expense ratio is also 0.1%. The ETF "is a solid alternative as it has some small and mid cap exposure in addition to the large caps found in XLY," Rosenbluth says.
Size Matters In Consumer Discretionary
It's important to note, though, that the fast growth in consumer discretionary companies is expected from the large caps. Midsize consumer discretionary companies are only expected to grow 11% annually in the next five years, says S&P Dow Jones Indices. And small companies in the sector are seen growing just 11.2% annually. As a point of comparison, small-cap technology stocks are expected to grow by 17% annually.
So, "investors that want a more security diversified alternative to XLY should consider" Invesco S&P 500 Equal Weight Consumer Discretionary ETF, says Rosenbluth. The $338 million in assets fund places equal investments one in the big caps in the sector. That means it's "less driven by Amazon and Tesla. The ETF is rebalanced quarterly," he said.
But there's another downside to consumer discretionary to be aware of. The sector's dividend yield is lower than what's paid by the S&P 500. The SPDR S&P 500 Trust is currently yielding 1.7%. That's considerably higher than the XLY's 0.8% yield.
If you're looking for future growth, though, sacrificing some yield may be well worth it.
Consumer Discretionary Champs
Expected earnings growth from top members of the Consumer Discretionary Select Sector SPDR
| Name | Ticker | Weight in ETF | Expected earnings growth 2020 — 2025 |
|---|---|---|---|
| Tesla | 22.5% | 1,020.6% | |
| Amazon.com | 22.0 | 144.4% | |
| McDonald's | 4.6 | 108.3% | |
| Home Depot | 4.5 | 62.7% | |
| Nike | 4.0 | 186.0% | |
| Lowe's | 4.0 | 122.8% | |
| Starbucks | 3.2 | 388.1% | |
| TJX | 2.3 | 1,580.8% | |
| Target | 2.3 | 58.9% |
