Consumer Conundrum: Assessing This ETF's Rebound Prospects

Last year, the Consumer Discretionary SPDR (ETF) XLY was the leader among the sector SPDR exchange-traded funds with a 9.9 percent gain. Less than two months into 2016, XLY has given all those gains back, and then some, with a 10.7 percent loss.

XLY's 2016 tale of trouble is not hard to figure out. Put simply, what worked for the ETF last year is not doing so this year.

Things Ain't What They Used To Be

Take the case of Amazon.com, Inc. AMZN. XLY's largest holding at a weight of 9.6 percent, Amazon has bled nearly a quarter of its value this year.

Amazon is just one example, but the stock's year-to-date tumble serves as a reminder that the consumer discretionary sector is typically more volatile than the broader market.

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“Consumer discretionary firms are more volatile than the broader market. During the past 10 years, this ETF has had a standard deviation of 18.4 percent compared with the S&P 500's 15.1 percent. That places this ETF between two large and competing consumer discretionary ETFs,” said Morningstar in a recent note.

A Longer Look At XLY

XLY, the largest consumer discretionary ETF by assets, follows the Consumer Discretionary Select Sector Index – meaning, its 88 holdings hail from the S&P 500. That gives the ETF a decidedly large-cap tilt with a weighted average market value of $81.1 billion. However, market capitalization heft does not insulate XLY and other consumer discretionary ETFs from macro issues.

“Amid macroeconomic worries in China, many investors fear companies' prospects for selling goods to China. However, Morningstar's equity analysts believe that the high end of consumption in China – middle- and upper-income consumers – can outpace the overall Chinese economy in the long run.

“Morningstar's analysts believe this can happen owing to increased investment in private businesses, saving rates and increased access to credit, increased government share of social welfare and healthcare costs, better investment returns for the middle class, and further returns for China's upper class,” said the research firm.

Amazon is not the only former leader hindering XLY this year. Last year, several of the best-performing member of the Dow Jones Industrial Average were also XLY components. This year, Walt Disney Co DIS, Home Depot Inc HD, McDonald's Corporation MCD and Nike Inc NKE are four of the 24 Dow stocks in the red. That quartet combines for nearly 24 percent of XLY's weight.