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No Surprise: Amazon is Important to Discretionary ETFs

This article was originally published on ETFTrends.com.

Traditional cap-weighted consumer discretionary exchange traded funds, such as the Consumer Discretionary Select Sector SPDR (XLY) , are usually dominated by shares of Amazon.com (AMZN).

For example, XLY, the the largest exchange traded fund tracking the consumer discretionary sector, devotes almost 22% of its weight to Amazon, or more than triple the weight the ETF assigns to its second-largest holding. In other words, Amazon's price action is a big deal for many consumer discretionary ETFs.

“It's not surprising that consumer discretionary is doing well, since one fifth of the sector is Amazon.com (AMZN), one of the most popular blue-chip stocks that has surged 35% since the beginning of the year. If we take out the e-commerce/tech behemoth, consumer discretionary has actually dropped 4.6% this year, not much better than the other retail sector, consumer staples,” reports Evie Liu for Barron's.

Life Without Amazon

As that data point confirms, consumer discretionary ETFs would be disappointing this year if Amazon was not part of the sector.

“Morgan Stanley's Gutman wrote that retailers' ROIC and earnings before interest and taxes (Ebit) margin have been consistently declining over the past five years, despite their improved capital discipline and moderate expansion,” according to Barron's.

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As the market moves toward the late stages of the business cycle, consumer discretionary stocks and sector-related exchange traded funds could underperform other market segments. XLY allocates nearly 30% of its weight to Internet and direct marketing retailers.

“On the other hand, e-commerce-challenged retailers - those most at risk from the rising of Amazon - have seen same-store sales dropping 1.7%, as well as eroding margin and return on invested capital,” reports Barron's.

Last year, index providers S&P and MSCI revealed they will be altering the telecom sector and renaming it communication services, meaning some of the media stocks currently held in XLY and rival cap-weighted consumer discretionary ETFs will leave that sector for the new communication services group. Those changes take place later this year.

Rivals to XLY include the Vanguard Consumer Discretionary (VCR) and Fidelity MSCI Consumer Discretionary Index (FDIS).

For more information on the consumer sector, visit our consumer discretionary category.