A Surprising Sector ETF For Avoiding International Revenue Exposure

At a time when many investors are assessing the international exposure of their equity holdings, it pays to evaluate that issue from the sector level. As has been noted, some defensive sectors generate the bulk of or close to all their revenue on a domestic basis.

What Happened

Last year, the S&P 500 got 43% of its sales from outside the U.S., down from 44% in 2017, but that percentage varies from sector to sector.

“The latest volatility in the S&P 500 Index has been driven in part by the ongoing and often escalating trade tensions between the U.S. and China,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note. “But not all sectors or companies in the widely-followed benchmark are similarly exposed to foreign markets.”

Why It's Important

Excluding real estate and utilities, two groups that generate nearly all of their revenue in the U.S., a surprising sector gets about two-thirds of sales in the U.S.: consumer discretionary. With the Consumer Discretionary Select Sector SPDR XLY, the largest ETF dedicated to the sector, down almost 7% month to date, far worse than the S&P 500's August decline, it seems like some investors may not be appreciating XLY's domestic focus.

Indeed, XLY components such as McDonald's MCD, Nike NKE, Starbucks SBUX and Walt Disney Co. DIS have heavy international footprints, but overall, S&P 500 consumer discretionary names get just 34% of their sales from markets outside the U.S. Excluding real estate and utilities, only consumer staples has a lower percentage of ex-US sales at 33%.

What's Next

Investors looking to dodge sectors with big international exposure may want to steer clear of energy and the Energy Select Sector SPDR XLE as Exxon Mobil XOM, that ETF's biggest holding, has massive ex-U.S. exposure.

“Market-cap weighted ETFs hold the heftiest stakes in the largest companies within a sector. In many cases, the largest companies have significantly high exposure to foreign sales,” said Rosenbluth. “For example, Exxon Mobil (XOM) was the largest holding in XLE and recently represented a 23% weighting. The integrated oil & gas company derived 65% of 2018 sales from foreign revenues. Canada and Europe were two of the company’s largest regional markets.”

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