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Investing in consumer discretionary stocks

A dynamic sector of the market that relies on a good economy.

The consumer discretionary sector is chock full of luxury. These non-essential goods, products and services carry 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 spending first.

What are consumer discretionary stocks?

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.

What industries does it include?

With products that range from cars to lipstick, the consumer discretionary sector covers a vast range of industries.

  • Automobiles. Companies that manufacture cars, trucks, motorcycles and scooters.
  • Hotels, restaurants and leisure. The service industry includes food and drink establishments, lodging and recreational activity venues such as theme parks.
  • Household durables. Residential products like furniture and appliances.
  • Multiline retail. Stores that offer diversified products, such as Macy’s.
  • Textiles, apparel and luxury goods. Manufacturers of clothing, accessories and luxury goods, such as Hermès designer handbags and Givenchy leather shoes.
  • Leisure products. These vendors of recreational products and equipment include sports gear and toys.

Consumer discretionary stocks vs. consumer staples stocks

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.

How to invest in the consumer discretionary sector

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:

  1. Pick a brokerage. Browse different brokerage platforms to choose a firm that suits your investing needs.
  2. Open an account. Most firms let you open a brokerage account online. Some accounts require a deposit to open, while others let you fund your account right before investing.
  3. Shop for securities. Use your platform’s research programs to examine different stocks and ETFs.
  4. Place an order. Give the order to buy the security.
  5. Track your portfolio. Monitor your investments by logging into your brokerage account.

What stocks are in the consumer discretionary sector?

Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.

What ETFs track the consumer discretionary sector?

A few popular ETFs that follow the sector include:

  • Consumer Discretionary Select Sector SPDR ETF (XLY)
  • SPDR S&P Homebuilders ETF (XHB)
  • Vanguard Consumer Discretionary ETF (VCR)
  • VanEck Vector Retail ETF (RTH)
  • Fidelity MSCI Consumer Discretionary Index (FDIS)
  • iShares US Consumer Services ETF (IYC)
  • iShares US Home Construction ETF (ITB)
  • SPDR S&P Retail ETF (XRT)
  • Amplify Online Retail ETF (IBUY)
  • Invesco Dynamic Leisure and Entertainment ETF (PEJ)

How is consumer discretionary sector performing?

Use the graph below to see how the Consumer Discretionary Select Sector SPDR ETF (XLY) is currently performing, as well as how it has been performing over the last three months, year and five years.

Why invest in the consumer discretionary sector?

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.

How are the dividends for consumer discretionary stocks?

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%.

What unique risks does the consumer discretionary sector face?

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:

  • Weak economy. The sector suffers in a declining economy, especially when there are high rates of unemployment. Consumers tend to tighten their spending and reduce luxury goods from their budget.
  • High interest rates. Consumers often purchase more expensive products, such as cars or jewelry, on credit. High credit card interest rates are harder on customers and may deter spending.
  • Poor consumer confidence. How people feel about the economy plays a key role in consumer spending. A positive outlook can lead to more spending, whereas a loss in confidence usually means that consumers are saving rather than spending. For example, when consumer confidence was at an all-time low in 2009 following the Great Recession, all major areas of spending — except healthcare — dropped an average of 2.8%, according to the US Department of Labor.

Compare stock trading platforms

You’ll need a brokerage account to buy stocks or ETFs. Use the table below to compare your options and find the best fit.

Name Product Asset types Option trade fee Annual fee Signup bonus
Robinhood
Stocks, Options, ETFs
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0%
Free stock (chosen randomly with a value anywhere between $2.50 and $200)
Sign up using the "go to site" link
Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
Sofi Invest
Stocks, ETFs, Cryptocurrency
N/A
0%
Get one free stock worth up to $1,000
Open an account
A free way to invest in stocks, ETFs and crypto.
Public
Stocks, ETFs
N/A
$0 per month
Download and sign up with Public.com; approved accounts receive a free stock slice worth up to $70, selected from 9 popular stocks.
Open an account
Commission-free trading in stocks and ETFs with a social networking twist.
Webull
Stocks, Options, ETFs
$0
0%
Get one free stock valued between $3.00 and $300 when you open an account, one more with a deposit
Open an account
Margin financing rates start at 3.99%. No monthly subscription fees for margin.
J.P. Morgan Self-Directed Investing
Stocks, Bonds, Options, Mutual funds, ETFs
$0 + $0.65/contract
0%
N/A
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Moomoo
Stocks, Options, ETFs
$0
$0 per year
N/A
Trade stocks on the US, Hong Kong, Shanghai and Shenzhen markets.
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Compare up to 4 providers

*Signup bonus information updated weekly.

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

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.

Compare online trading platforms to find a brokerage firm when you’re reading to start investing.

Frequently asked questions

Is the consumer discretionary sector cyclical?

Yes. This sector’s performance is dependent on how the economy is doing. Consumers only spend money on things they don’t necessarily need when they have enough income for necessities.

Does a weakening economy affect all consumer discretionary stocks the same way?

No. Industries perform differently during economic downturns. For instance, after the Great Recession of 2008, the furniture industry saw a bigger drop than hotels and lodging.

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