The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY). XLY is the largest exchange traded fund tracking the consumer discretionary sector, is higher by nearly 22% this year. The sector has the potential to be strong again in 2018.
As the market moves toward the late stages of the business cycle, consumer discretionary stocks and sector-related exchange traded funds could underperform other market segments. However, it is clear XLY is rebuffing that idea this year. XLY holds 85 stocks and tracks the Consumer Discretionary Select Sector Index.
“Consumer cyclical sector valuations rose slightly this quarter, with a weighted average price/fair value ratio of 1.03, slightly ahead of last quarter’s 0.98. We attribute this increase to rising consumer confidence, a factor that should support spending across numerous discretionary industries,” according to Morningstar.
Amazon.com Inc. (NASDAQ: AMZN) is playing a significant part in the surge by XLY and other cap-weighted consumer discretionary ETFs. XLY allocates nearly 17% of its weight to Amazon, more than double its weight to its second-largest holding, Dow component Home Depot Inc. (NYSE: HD).
“We believe Amazon has essentially won the battle with retailers in commodified categories such as electronics, office products, and toys, and is now turning to categories with potential subscription/third-party seller plays (including grocery, apparel, pharmaceuticals, and beauty) or unique logistics value propositions (such as home furnishing and auto parts), which could temper operating margin potential in certain categories,” said Morningstar.