Consumer Discretionary vs. Staples: What ETFs Can Tell Us

Despite some signs of slowdown in the economy, the biggest stories in the market still revolve around big tech earnings and artificial intelligence. Big 7 stocks stretch across technology, communications, and consumer discretionary: Microsoft [MSFT], Apple [AAPL], and Nvidia [NVDA] in technology; Meta Platforms [META] and Alphabet [GOOG] in communications; and Amazon [AMZN] and Tesla [TSLA] in consumer discretionary).

As a result, these three sectors have seen a large boost from technology and AI factors. This is especially so, with several of these companies reporting earnings beats this past week. Now crypto is back above $35,000. With the possibility of spot bitcoin ETFs growing closer, investors are keeping their eye on riskier investments. But instinct also tells us that consumer spending is running out of steam.

So when is it time to start increasing your allocation back into defensive sectors or less risky assets? This note looks at the consumer discretionary sector vs. the consumer staples sector and what these ETFs can tell us about the market.

Sector performance of discretionary still far ahead of staples, despite recent shifts in sentiment.

On a market-cap-weighted basis, the consumer discretionary sector is the third (out of 11) best-performing sector YTD after communications and technology. In the Consumer Discretionary Select Sector SPDR Fund (XLY), these two stocks make up over 40% of the ETF’s weight. On an equal-weighted basis (which excludes the overweighted exposure to Amazon and Tesla), the sector is only the fifth best-performing sector (as measured by the Invesco S&P 500 Equal Weight Consumer Discretionary ETF [RSPD]). YTD, consumer discretionary ETFs have seen the fourth and seventh highest inflows out of the broad universe of sector ETFs. Recently that sentiment has shifted as the sector has seen the highest outflows on a one-month basis.

Discretionary YTD Performance Has Weakened

The staples sector, on the other hand, has been the third-worst-performing sector on a market-cap-weighted basis (the Consumer Staples Select Sector SPDR Fund [XLP]) and the worst-performing sector on an equal-weighted basis (the Invesco S&P 500 Equal Weight Consumer Staples ETF [RSPS]). The gap has narrowed between the two recently, but overall, discretionary still significantly outperforms staples despite a weaker consumer.

Staples and Discretionary Gap is narrower