Consumer Discretionary Or Staples? (XLP, XLY, PG, DIS, CMCSA)

The sector rotation that has been taking place in the market has shifted money from sectors perceived as high-risk into more stable areas. There is no better example than that of consumer stocks. Money has been coming out of the consumer discretionary stocks and making its way into the less-risky consumer staples throughout 2014.

The SPDR Consumer Staples ETF XLP is up three percent this year as the SPDR Consumer Discretionary ETF XLY has lost five percent. While the eight percent difference may not be earth shattering, it is significant in that it has take place in a matter of less than five months.

XLP is a basket of 42 stocks that include food & staples retailing, household products, beverages, food and tobacco. Household giant Proctor & Gamble PG is the number one holding, making up 13 percent of the portfolio. The stock is down slightly this year and has weighed on the performance of XLP, while others in the top 10 have picked up the slack.

The ETF hit a new all-time high this week before pulling back with the overall market the last few days and it appears the current rally still has legs to move higher. The annual expense ratio is a low 0.16 percent and the current dividend yield, which is attractive to many investors, is 2.4 percent.

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XLY is made up of 87 stocks with a more diversified portfolio than XLP. The sectors that account for the largest portion of the allocation include media, specialty retail, hotels & restaurants and Internet retail. The two largest holdings are Walt Disney Company DIS and Comcast CMCSA. XLY also hit an all-time in March of this year, but that was followed by an eight percent sell-off and the ETF has yet to gain back any momentum in the last month. The ETF also charges an annual expense ratio of 0.16 percent and the current dividend yield is 1.25 percent.

Going back to 2010, XLP is up 67 percent versus a gain of 113 percent for XLY. While over the longer-term XLY has greatly outperformed, recently investors have chosen boring over exciting based on fear the market could be near a top. When analyzing the fundamentals, both ETFs trade with a P/E ratio of 18.5, however XLY has 3-5 year estimated growth of 16 percent versus nine percent for XLP. Based on only the fundamentals it appears XLY is the better longer-term option, but when a sector rotation begins it could last for months if not longer.

In the end, even though both ETFs cover the consumer, they are far different and it would not be a bad idea to gain exposure to both sectors if the belief the overall market will continue higher.