The Consumer Discretionary SPDR (ETF) (NYSE:XLY) is the best performer among the nine sector SPDR exchange-traded funds this year, and the competition is not even close.
With a year-to-date gain of 14.1 percent, XLY tops second-place Technology SPDR (ETF) (NYSE:XLK) by 650 basis points.
Likewise, XLY, the largest consumer discretionary ETF, sports year-to-date returns that are more than double those offered by third-place Health Care SPDR (ETF) (NYSE:XLV). But in the case of XLY, a bet on the ETF to keep its upside going into 2016 will not come cheap. In fact, betting on further upside for the consumer discretionary sector, the fourth-largest sector weight in the S&P 500, is downright expensive.
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The Consumer Discretionary Space
The S&P 500 currently trades at 17.4 times earnings, but the multiple on XLY is north of 21, according to State Street data. However, it can be argued that XLY warrants the higher multiple because it is home to some industry groups with robust earnings growth expectations.
In terms of year-over-year earnings growth, six of the thirteen retail sub-industries in the S&P 500 are predicted to report growth in earnings for the fourth quarter, led by the Internet Retail (52.1 percent), Drug Retail (20.8 percent), and Home Improvement Retail (9.6 percent) sub-industries.
On the other hand, seven of the thirteen retail sub-industries in the S&P 500 are predicted to report declines in earnings, led by the Home Furnishing Retail (-14.0 percent) and Hypermarkets & Super Centers (-9.0 percent) sub-industries, according to a FactSet note.
A Closer Look AT XLY
Led by Amazon.com, Inc. (NASDAQ:AMZN), one of just two S&P 500 members to at least double this year, XLY devotes 16.3 percent of its weight to Internet and catalog retailers. Amazon accounts for a hefty percentage of that as XLY's largest holding with an allocation of 10.6 percent. Netflix Inc. (NASDAQ:NFLX), the other S&P 500 stock that has doubled this year, is 2.1 percent of XLY's weight.
With a combined weight of just over 10 percent to Home Depot Inc (NYSE:HD) and Lowe's Companies, Inc. (NYSE:LOW), XLY is also amply exposed to the trend of positive earnings growth from home improvement retailers.
XLY's year-to-date performance is made all the more impressive when considering the ETF's 24.6 percent weight to media, one of the worst performing discretionary sub-industries this year.
Dow component the Walt Disney Co (NYSE:DIS) slumped 3.3 percent last week, but the shares are among the blue-chip index's best performers this year with a 22.2 percent gain. That has been a help to XLY, as the ETF's devotes almost 6 percent of its weight to Disney. XLY was able to post a modest gain last week, even as Disney tumbled.
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