Buy This Consumer Goods ETF When Incomes Are Rising

By Motley Fool Staff Markets Fool.com

In this segment fromIndustry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Asit Sharma as they look at the Consumer Discretionary Select Sector Fund (NYSEMKT: XLY). This exchange-traded fund, or ETF, tracks the performance of 88 consumer goods companies in the S&P 500Index with an average market capitalization of $28 billion. Learn which types of stocks are represented in in this fund and why it's an essential investment to follow.

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A full transcript follows the video.

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This podcast was recorded on Nov. 29, 2016.

Vincent Shen: The first one, Consumer Discretionary Select Sector. The ticker symbol for this ETF is XLY. It's been around since December of [1998]. Shares trade currently at around $82. You can see how this is quite accessible to beginning investors with a smaller pool of funds. It tracks about 88 constituents in the S&P, and the mean market cap is about $28 billion, if you weight that it's closer to about $100 billion. But this has some really big companies. Top 10 holdings include Amazon, Comcast, Home Depot, Walt Disney. Very big names. What else can you tell us, Asit, about this fund, and how people can approach it?

Asit Sharma: Let's zero in on this word discretionary. I know, as I became more familiar with consumer good stocks, I kept hearing least two words -- "discretionary" and "staples". For a long time, I didn't really clearly understand what the difference between the two is. This ETF tracks those stocks which try to make their earnings on discretionary income. Amazon is a great example. I had a Prime subscription, I dropped it. As soon as I did, I begin to feel sorry, because to watch some of the content I wanted, I would have to have the Amazon Prime video service, to listen to audiobooks, I would have to have a separate subscription to audible.com. But in both cases, that's my discretionary income. Your discretionary income is non-essential income, and it pours into stocks like Amazon, Comcast, McDonald's.

Together, this basket of stocks that we talk about tends to do very well when income rises. Just to give you a few facts on this particular ETF, we mentioned at the beginning of the show the expense ratios. This has an expense ratio of 0.14%. If you're just getting into ETFs, that might sound like an odd number. An ETF can have an expense ratio of less than 1%, all the way up to several percent. Generally, if you hear that an ETF has an expense ratio of below 1%, that's pretty good. This one, being close to 0.1%, it's very efficient in terms of managing your money. It's not a small ETF. It has about $10.8 billion in net assets. It also pays a dividend based on the aggregate dividends it collects of about 1.5%.

Let's talk about valuation. If you wanted to jump in and buy this ETF, you might be curious -- how does it stack up against the market as a whole? One big-picture thing to understand about consumer good stocks in general is, they tend to track the broader market. This ETF has a forward P/E of close to 20. That means the stocks, on average, in this basket, traded at about 20 times forward one-year earnings. It's about the same as the general market, in terms of valuation. One last thing is, this ETF has a beta of 1.0. That means, in terms of volatility, it's right about as volatile as the rest of the market. We equate the volatility of 1.0 with the market. If you're above that number, you're a more volatile instrument, and if you are below it, you are a less volatile instrument.

Shen: Yep. That's a really great rundown of some key stats and attributes of this fund. There's another piece of the information that they share in their fact sheet, which is a breakdown of the industries you're buying into by weight. Media is the biggest, it's about 23% of the holdings. Beyond that, you have internet and direct marketing retail at about 20%, specialty retail about 20%, hotels, restaurants and leisure at about 13%, it goes down from there. But, besides just the specific companies, you can also get a sense of, big picture, we know this is more the consumer discretionary sub-sector, but then the industries within that, what exactly are you getting exposed to through this fund? If you're more interested in media and e-commerce, for example, this might be something that's right up your alley.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Walt Disney. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.