ETFs tracking consumer discretionary stocks may not be the best way to access rising spending theme.
With vaccine roll-outs picking up in countries across the world, economies should soon start to open up again. This, some argue, will bring about a boom in consumer spending. People will once again be able to spend money on social activities, eating and drinking out and maybe even holidays. And with places to go and things to do, many may also start to spend more on clothing and other items.
Some consumers will also be flush with cash. Those who have managed to avoid job losses or reduced hours have been saving like never before. Data from the Office for National Statistics (ONS) shows that households are now saving about 30% of their income – the highest level ever. The situation is similar in other developed economies. A large chunk of those savings can be seen as pent-up demand, ready to be spent when lockdowns are lifted.
On top of that, this recovery in consumer spending should bring with it the wider economy and labour market. Better job prospects should further boost people’s ability and desire to spend and consume.
Of course, this is the most bullish case. There are plenty of risks. The vaccine roll-out may be slower than expected or new variants of the virus could prove vaccine-resistant and derail current roll-outs. Consumer habits may have been permanently changed by the pandemic. Employment could also take longer to return to pre-pandemic levels, causing many consumers to keep their belts tight.
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But for those convinced of the bull case, consumer discretionary ETFs may seem like a sensible way to play this trend. Consumer discretionary is a term for classifying goods and services deemed “non-essential” - exactly the sort of things consumers should spend more money on when the economy opens back up. So, an ETF tracking a basket of stocks may appear like a good idea.
There are several consumer discretionary-focused ETFs on interactive investor. For exposure to US discretionary spending, there is the Invesco Consumer Discr S&P US SelSec ETF GBP (LSE:XLYP), which tracks the S&P Select Sector Capped 20% Consumer Discretionary Index for 0.14% a year.
Another option is the Xtrackers MSCI USA Consumer Discretionary UCITS ETF (LSE:XUCD), which tracks the MSCI USA Consumer Discretionary 20/35 Custom Index for 0.12%. For global exposure to the theme there is the Xtrackers MSCI World Consumer Dscrt ETF 1C (LSE:XDWC), which tracks the MSCI World Consumer Discretionary Total Return Net index for 0.3%.
Unfortunately, these ETFs are not a particularly good way to play this potential trend, given their current weightings.
All of the above-mentioned ETFs have substantial weightings towards Amazon (NASDAQ:AMZN). The Invesco ETF has a 20% weighting to Amazon, while the Xtrackers ETF focused on US consumer discretionary has a 30% weighting to Amazon and the Xtrackers MSCI Wld Consumer Dscrt ETF 1C (LSE:XDWC) has a 22% weighting.
This makes sense – Amazon is a consumer discretionary stock. However, it is not the sort of consumer discretionary business poised to benefit from lockdowns being lifted. Being an e-commerce company, Amazon has not been a victim of the lockdowns. Quite the opposite, in fact. Consumers stuck at home have taken to ordering more than ever on Amazon and the firm has been expanding its workforce.
This has all been reflected in Amazon’s share price, with the stock more than 50% higher compared to where it was one year ago. It is not the sort of company that seems poised to rebound from economies re-opening and consumers going back out into the physical world.
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While Amazon is a consumer discretionary stock, it is also a tech stock. It is part of a handful of tech stocks that have done very well during the pandemic because their businesses models have been well suited to lockdowns.
However, there is another aspect to this; tech stocks such as Amazon also do well when economic growth is weak. Being fast-growing companies, investors are prepared to pay a premium for them when there is not much growth around. This was the case over the past decade, where developed economies experienced weak recoveries after the financial crisis. It has also played out over the past year of lockdowns.
But if the bullish thesis on a consumer spending rebound turns out to be correct, that could mean enthusiasm for high-growth tech stocks subsides. If investors really have been buying fast-growing Amazon because of sluggish growth in the rest of the economy, a return to broader growth should surely go against it, at least to some extent.
Another aspect of Amazon’s tech stock status to consider is central bank interest rates. Tech and growth stocks such as Amazon are seen as particularly sensitive to interest rates. The past decade of low interest rates has helped boost the valuations of such stocks.
So if Amazon’s share price growth has been partly the result of sluggish economic growth combined with ultra-low interest rates, the consumer spending thesis is not necessarily such good news for Amazon’s share price. Economic growth should return, while (although unlikely for some time) inflation and interest rate rises may be round the corner. Amazon is still a good company and investors may still want to own it, but it is not really part of the consumer spending rebound theme.
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It is worth noting that the two Xtracker ETFs also have a sizeable weighting to Tesla (NASDAQ:TSLA) – 15% for the US-focused one and 10% for the global one. The electric car maker has performed very well lately, and many investors may be happy with this exposure.
However, like Amazon, Tesla is a tech stock that has also benefited from a backdrop of low economic growth and low interest rates. On top of that, its huge share price increase over the past year has resulted in the stock being the top holding of several other popular funds, meaning investors should ask if a consumer discretionary ETF would result in too much exposure to this stock.
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