The consumer discretionary sector is full of luxury. These non-essential goods, products and services include popular designer names like Michael Kors and Ferrari, and also include restaurants, coffee shops and golf courses. Consumer discretionary stocks soar during a robust economy, but investors should be wary during a downturn — consumers tend to cut this type of spending first.
The consumer discretionary sector is one of 11 sectors of the stock market. These businesses include products and services that consumers may want, but don’t necessarily need. For example, high-end clothing, big-screen televisions, family vacations and sporting goods fall under this category. Consumers usually purchase these non-essential goods or services when they feel confident about their finances and have some disposable income.
With products that range from cars to lipstick, the consumer discretionary sector covers a vast range of industries.
Consumer discretionary stocks offer products or services that people enjoy, but can live without. Consumer staples are things we need, such as food, beverages, household essentials and hygiene products like toilet paper.
No matter how the economy is doing, you’ll always stock your house with consumer staples. But, in a waning economy, you might eliminate the nonessentials.
There are two ways to invest in the consumer discretionary sector: individual stocks or exchange-traded funds (ETFs). When you invest in a particular consumer discretionary stock, you buy shares of the company. There are fewer fees, but more risk involved. If you go the ETF route, you’ll get a basket of consumer discretionary stocks, which come with higher fees but diversifies your portfolio and lowers your exposure risk.
A breakdown of how to get started:
How to start investing in the stock market
Consumer discretionary stocks include both domestic and international companies that produce all sorts of non-essential and luxury goods. If you’re interested in a specific material or commodity, take some time to research the company, its history and its financials before you buy in.
A few popular ETFs that follow the sector include:
You can invest in consumer discretionary ETFs from Canada, but if you’re looking for more options, you can also explore ETFs that trade on stock exchanges in other countries like the NYSE in the US. There are several Canadian-based brokerages that offer access to international exchanges on which consumer discretionary ETFs trade including Interactive Brokers and Questrade.
Use the graph below to see how the Consumer Discretionary Select Sector SPDR ETF (XLY) in the US is currently performing, as well as how it has been performing over the last three months, year and five years.
Consumer discretionary stocks have the potential for high returns, especially when the economy is strong. For example, during the start of the longest economic expansion in US history, the S&P 500 Consumer Discretionary Index returned 41.3% in 2009, compared to the S&P 500 Index’s 26.5%. And it continued to bring in consistently higher returns for many years.
Another benefit of the consumer discretionary sector is that it’s easier for investors to gauge entry into the market. Since consumer discretionary stocks perform in tandem with the economy, investors can monitor economic indicators, such as the gross domestic product (GDP), to judge whether it might be a good time to start investing.
Consumer Discretionary stocks dividends are usually comparable to the rest of the market. But economic downfalls can lead to dividend cuts.
For example, in September 2019, the SPDR S&P Retail ETF (XRT) had a yield of 1.99%, compared to the S&P 500 Index’s (SPY) 1.97%. But just a few months later, the COVID-19 pandemic forced consumers to stay at home and shut down major retailers, hotels and restaurants.
Many stocks plummeted, affecting dividend payouts as well. In June 2020, the SPDR S&P Retail ETF (XRT) had a yield of 0.86%, steeply trailing the S&P 500 Index’s (SPY) dividend of 1.75%.
Economic cycles have a big hand in how consumer discretionary stocks perform. Since this sector is extremely unpredictable, here are a few things to watch out for:
You’ll need a brokerage account to buy stocks or ETFs. Use the table below to compare your options and find the best fit.
To make comparing even easier we came up with the Finder Score. Trading costs, account fees and features across 10+ stock trading platforms and apps are all weighted and scaled to produce a score out of 10. The higher the score the better the platform - simple.
The consumer discretionary sector may be a good choice when the economy is growing and consumers feel good about their job and finances. But tread carefully when the economy starts trending down.
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