Discretionary Spending: The ETF Or The Stocks?

Published on Wednesday, 29 February 2012 01:11 Written by Todd Shriber

New York, February 28^th (TradersHuddle.com) – If A resurgent U.S. economy and stock market has been quite kind to the Consumer Discretionary Select Sector SPDR (NYSE: XLY), the oldest and largest discretionary ETF. From an October bottom that saw the ETF break $33 on the downside, the ETF is up about 20% and 11.1% since the start of 2012. Every encouraging labor or consumer confidence report adds a little more fuel to XLY’s fire, so that begs the question: What’s better? The ETF or some of its biggest holdings?

XLY’s top-five components are a familiar lot to say the least. McDonald’s (NYSE: MCD), Comcast (NASDAQ: CMCSA), Walt Disney (NYSE: DIS), Home Depot (NYSE: HD) and Amazon (NASDAQ: AMZN) comprise that group. That’s three Dow stocks, one of the largest U.S. cable providers and one of the most formidable names in e-commerce.

XLY’s performance against its top-five holdings year-to-date isn’t all that surprising. McDonald’s has been surging for two years and that stock has pulled back. While Amazon is higher on the year, the stock has been extremely volatile and XLY has outpaced the Nasdaq darling as well. On the other hand, XLY has lagged Dow components Home Depot and Walt Disney while getting trounced by Comcast.

Expand the time horizon to a year and XLY only beats Amazon and Disney with McDonald’s leading the group by a wide margin. Over the past two years, XLY’s performance is undeniably strong with a gain of almost 40%, but that’s only good enough to beat Disney over the same time frame. Over the past five years, there aren’t really any surprises as Amazon leads this group by a wide margin and McDonald’s comes in second. XLY, Home Depot, Disney and Comcast are close to each other fighting for the third spot.

The review of various time frames is instructive because we learn that XLY has, for the most part, consistently lagged Amazon and McDonald’s while usually outperforming Disney. Things become more interesting for those investors with really long-term holding periods. Assume you had bought XLY the day it debuted in December 1998 and held it until now. Chances are you would not be complaining about your 66% gain.

Not surprisingly over that time, Amazon and McDonald’s are the stocks that top XLY. The ETF beats Comcast, Disney and Home Depot. What is surprising though is the margin by which the ETF beats that trio. Home Depot is barely positive over that time and while Comcast and Disney are higher, they still lag XLY by double-digit margins.

Chances are most investors would not have invested in Amazon following the beating it took post-tech bubble and with Amazon’s triple-digit price tag these days, the stock is prohibitive to most investors. Said differently, Amazon is a rare growth case and it’s probably OK to be a little mad if you chose XLY over McDonald’s. Overall though, the ETF has been a fine option compared to some of its other major components and it’s hard to quibble with those results.