For investors who like to diversify with sectors that can potentially outperform the broader market indices, consumer discretionary stocks look appealing.
The outlook for a healthy U.S. consumer looks bright. Unemployment is below 6%, payrolls are increasing, personal debt is decreasing, the housing market is healthy, and a strong dollar makes for cheaper imported goods.
Consumer discretionary stocks, also known as consumer cyclicals, are firms that provide leisure goods or services that consumers may not need but they still enjoy them and therefore tend to buy more of them when the economy is healthy.
In other words, you may see consumer discretionary stocks like Home Depot (HD), Walt Disney (DIS) or Starbucks (SBUX) outperform during consumer spending cycles. But for broad exposure to these stocks, you can’t beat consumer discretionary funds.
If you are looking for Santa Claus to bring consumer cheer for 2015, here are three of the best consumer discretionary funds to buy now.
Best Consumer Discretionary Funds: iShares US Consumer Services (IYC)
If you want a diverse means of bulking up your exposure to the U.S. consumer, iShares US Consumer Services (IYC) is an outstanding way to do it.
You’ll get exposure to big box retailers like Wal-Mart Stores Inc (WMT) but also entertainment groups like Time Warner Inc (TWX) and healthcare companies like CVS Health Corp (CVS).
Performance has been impressive with annualized returns, through October 31, beating out 99% of competitors for year-to-date and 10-year returns, and beating 80% for 3-year returns.
The expense ratio is attractively low at 0.45%, or $45 for $10,000 invested.
Best Consumer Discretionary Funds: Consumer Discretionary Select SPDR (XLY)
Consumer Discretionary Select SPDR (XLY) is a fund with a portfolio consisting of nearly 100% U.S. stocks with concentrated exposure to firms in the S&P 500 Index that largely depend on discretionary consumer spending.
This low-cost ETF owns a diverse mix of retail firms, restaurants, media companies, apparel and luxury goods companies, automobile manufacturers, and leisure firms. Top holdings include McDonald’s Corp (MCD), Comcast Corporation (CMSCA), and Amazon.com Inc (AMZN).
The 5-year annualized return places XLY comfortably in the top quartile for performance among consumer discretionary funds and the 1- and 3-year returns are in the top half.
The expense ratio of 0.16% is among the lowest for consumer discretionary funds.
Best Consumer Discretionary Funds: Vanguard Consumer Discretionary ETF (VCR)
Vanguard Consumer Discretionary ETF (VCR) offers investors the same Vanguard tradition of broad diversification and low costs that work well with the majority of their sector funds.
With 385 holdings, the VCR portfolio provides large and wide representation of consumer discretionary stocks and thus an attractive means of gaining exposure to the U.S. consumer.
For year-to-date, 1-year, 3-year and 5-year returns, Vanguard Consumer Discretionary ranks among the best funds in the consumer cyclicals category with performance exceeding 75% of other consumer cyclical funds.
And, as investors have come to expect with Vanguard, VCR has a rock bottom expense ratio of just 0.14%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
