An Efficient ETF Avenue To Amazon Exposure

Shares of Amazon.com Inc. AMZN slumped Friday after the e-commerce company reported disappointing fourth-quarter sales — news that sparked some estimate and price target revisions from Wall Street analysts.

Amazon forecast first-quarter sales of $33.25 billion–$35.75 billion, below the Wall Street estimate of $36 billion. Over 100 exchange-traded funds feature exposure to Amazon, and some are not digesting news of the earnings disappointment well. Others are dealing with only minor losses.

Amazon And XLY

The Consumer Discretionary SPDR (ETF) XLY is in the latter category. XLY, the largest consumer discretionary ETF by assets, is trading slightly lower Friday, something of an accomplishment considering the ETF's 13.7 percent weight to Amazon, which is 630 basis points above the ETF's second-largest holding, Comcast Corporation CMCSA.

“The Select Sector SPDR ETFs tend to have high-quality portfolios as they draw from the S&P 500 and have a very large-cap tilt. The firms they hold also are high-quality because they have durable competitive advantages and strong profitability,” said Morningstar in a recent note.

XLY charges just 0.14 percent per year, or $14 on a $10,000 investment, making it a cost-efficient avenue for capital-constrained investors looking for Amazon exposure. Of the 103 ETFs featuring exposure to Amazon, only the VanEck Vectors Retail ETF RTH has a larger weight to the stock than does XLY.

Beyond Amazon

XLY holds 88 stocks and while many can be considered quality names, including Dow components Home Depot Inc HD and Walt Disney Co DIS, that does not imply this ETF is free of volatility. In fact, the consumer discretionary is typically more volatile than the broader market.

“Consumer discretionary firms are more volatile than the broader market. During the past 10 years, this ETF has had a standard deviation of 18.3 percent compared with the S&P 500's 15.3 percent,” noted Morningstar.

Macro Factors

There are also macro factors to consider when mulling investments in XLY or competing discretionary ETFs. For example, many of the companies found in these ETFs have significant overseas exposure.

“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,” said Morningstar.