Image Source: Pexels
 

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 companies' business models shifted. 

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 Goods. 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 a huge absorption, nearly doubling its overall weight with respect to the parent S&P 500 Index. This was caused by the mass migration of e-commerce companies spearheaded by Amazon (AMZN) into the sector from the Information Technology sector. A small counterbalance, reducing the sector’s weight somewhat, also occurred.  Media Industry companies were moved out of the sector and into the newly renamed Communications Sector (formerly Telecommunications). The new Communications 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 (META), Alphabet (GOOG), and Netflix (NFLX).   

In 2023, more GICS reclassifications further changed the nature of the constitution of the Consumer Durables sector. The most important change was the loss of retailers, which generated most of their revenues from consumer staples products. 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 mean 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 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. 

With this as background, we turn our “sector spotlight” to Consumer Discretionary this week. According to ETFdb.com, 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.

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 sectors 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 first decade of this century, mega-cap stocks constituting 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 comprised 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 Table 3 (Hold). Perhaps, at least since 2009, market-cap-weighting isn’t such a dumb idea after all.

Turning 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 underrated by 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.

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 both rated 4 and 5, and also undervalued compared to most 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.  

More By This Author:

Nov. 3 Review And Strategy Outlook - Still Upbeat - Expect More Of The Same
2025 3Q Review: Bears Capture Headlines While ETF Bulls And Gold Bugs Garner Profits - A Granular Look At The Drivers
And So, The 4th Quarter Of 2025 Begins...