Meet This Year's Best Consumer Discretionary ETF

As many investors by now know, the consumer discretionary sector, the fourth-larges sector weight in the S&P 500, is this year's best-performing sector. Among the many exchange traded funds tracking the consumer discretionary group, a familiar takes the honors as this year's best discretionary ETF: The Consumer Discretionary Select Sector SPDR XLY.

Simply put, XLY has trounced the other sector SPDRs. Including dividends paid, XLY is up 10.6 percent year-to-date. That is an advantage of 310 basis points over the Consumer Staples Select Sector SPDR XLP. Not only that, but XLY has easily toppled rival, capitalization-weighted consumer discretionary ETFs. XLY is sporting an advantage of 380 basis points over the Vanguard Consumer Discretionary ETF VCR.

Yes, there have been some discretionary industry ETFs, including one retail ETF, that have outpaced XLY, but among the pure play discretionary ETFs, XLY is this year's leader. 

Identifying the drivers of XLY's success this year is not difficult. Four members of the Dow Jones Industrial Average that have posted double-digit year-to-date gains – Walt Disney Co. DIS, Home Depot Inc. HD, McDonald's Corp. MCD and Nike Inc. NKE – are members of XLY's lineup.

That gives XLY the largest number of double-digit Dow winners this year among all of the sector SPDRs. None of the other sector SPDRs is home to more than two Dow stocks that have posted gains of at least 10 percent this year. In order, Home Depot, Disney, McDonald's and Nike combine for 23.6 percent of XLY's weight.

Of course Amazon.com Inc. AMZN cannot be ignored as a key driver of XLY's returns in 2015. Shares of the e-commerce juggernaut have more than doubled this year and the stock's rapidly ascending market value means it is now XLY's largest holding. The ETF's Amazon allocation is nearly 11 percent, or about 370 basis points more than is allocated to Home Depot, XLY's second-largest holding.

Not surprisingly, investors are now faced with the specter of paying up for the privilege of getting involved with XLY and its high-flying components.

The S&P 500 currently trades at 17.4 times earnings, but the multiple on XLY is north of 21, according to State Street data. However, it can be argued that XLY warrants the higher multiple because it is home to some industry groups with robust earnings growth expectations. 

“In terms of year-over-year earnings growth, six of the thirteen retail sub-industries in the S&P 500 are predicted to report growth in earnings for the fourth quarter, led by the Internet Retail (52.1 percent), Drug Retail (20.8 percent), and Home Improvement Retail (9.6 percent) sub-industries. On the other hand, seven of the thirteen retail sub-industries in the S&P 500 are predicted to report declines in earnings, led by the Home Furnishing Retail (-14.0 percent) and Hypermarkets & Super Centers (-9.0 percent) sub-industries,” according to a FactSet note.