It’s hard for shoppers to avoid Amazon — even in their ETFs
Should you invest in the consumer discretionary sector?
Your answer to that question comes down to whether you believe an economic downturn is imminent. If so, companies producing toothpaste and other consumer staples may be better-positioned. But if not, companies that make the things consumers like to buy, but don’t necessarily need, may outperform.
As complicated as that question is, there’s another consideration that may be even more thorny. If you’re thinking of using an exchange-traded fund to trade your investment idea, grabbing exposure to a broad basket of stocks rather than just one company, you may be in for a big surprise.
That’s because among the biggest consumer discretionary ETFs, one company commands an outsize presence. Amazon.com Inc.
There’s nothing wrong with owning Amazon stock, points out Rick Daskin, who runs his own wealth-management firm, RSD Advisors. For the year to date, shares have gained nearly 17%, which is not quite as strong as the broader benchmarks like the S&P 500
is “concerning from a diversification point of view. The whole point of buying an ETF is not buying one thing.”
Is there a hard-and-fast rule as to what level of concentration is too much? Not really, Daskin said, but double digits may be where it starts to get concerning. “23%, oof,” he added.
Fund name and ticker
Amazon as percent of all holdings
Total assets under management
Consumer Discretionary Select Sector SPDR Fund (XLY)
Vanguard Consumer Discretionary ETF (VCR)
iShares U.S. Consumer Services ETF (IYC)
Fidelity MSCI Consumer Discretionary Index ETF (FDIS)
iShares Global Consumer Discretionary ETF (RXI)
iShares Evolved U.S. Discretionary Spending ETF (IEDI
Sources: fund web sites, FactSet
Amazon or no, it’s also a good reminder that you should always, always read fund literature before investing. The fund manager, or index developer in the case of a passively-managed fund, may have different ideas of what stocks best express a theme than you do. And he or she obviously has no idea what other individual stocks or funds you may own.
It’s also worth keeping in mind that Amazon’s massive scale may even keep it less tethered to traditional sector outlines than older companies. After all, the company has been clear that it wants to be consumers’ first stop for groceries and diapers — and has teased, though not yet executed on, everything from banking to real estate services.
A short list of the bigger consumer discretionary ETFs and their exposure to Amazon is above. In just about every case, whether Amazon makes up 9% or 22% of the fund, it is the single biggest holding in the fund, even in the iShares Global Consumer Discretionary ETF, a fund that states it aims to provide investors a “global sector view.”