ETFs
More than half of Vanguard’s sector ETFs are within 3% of all-time highs. Here is my top pick to buy now
The stock market rally extends well beyond growth stocks.
THE S&P500 consists of 11 sectors, and Vanguard has a low cost exchange traded fund (ETF) for each of them. Each ETF carries an expense ratio of just 0.1%, or an annual fee of $1 for every $1,000 invested.
THE Vanguard Information Technology ETF, Vanguard Industries ETF, Avant-garde Consumer Staples ETF, Avant-garde Materials ETFs, Avant-garde Financial ETFsAnd Avant-garde Healthcare ETFs are all down less than 3% from their all-time highs. Strong performance in growth and value-oriented sectors highlights widespread stock market rally.
Each sector has its advantages and disadvantages, but my first choice to buy now is the Vanguard Consumer Discretionary ETF (VCR 0.59%), which has been one of the worst performing sectors year to date and is down almost 15% from its all-time high. Here’s why it’s worth buying the consumer discretionary sector’s dip.
Image source: Getty Images.
A justified liquidation
The consumer discretionary sector is one of the easiest to understand because it includes many consumer-facing companies. The five biggest titles are Amazon, You’re here, The reception depot, McDonaldsAnd Lowes. Together, they represent 46.9% of the Vanguard Consumer Discretionary ETF.
The fund holds car manufacturers, restaurants like Chipotle Mexican Grillhotels and travel agencies like Airbnbclothing brands like Lululemon Athleticacruise lines and a variety of retail outlets Ross Stores has Supply of tractors, O’Reilly Automotive, Automatic zoneand more.
The term “discretionary” can be somewhat misleading since it implies a spending choice rather than a need. After all, one could argue that getting a replacement car battery from AutoZone is a necessity rather than a discretionary expense.
However, in general, companies in the sector rely on consumers to spend money on expenses that come after what is absolutely necessary to live (food, basic household items, etc.). This is why you will find Walmart And Procter & Gamble in the Vanguard Consumer Staples ETF.
Discretionary consumption can be a double-edged sword. When an economic boom is fueled by consumer spending and business growth, spending on goods, services, travel, etc. increases. tend to increase. This leads to expensive purchases like a new vehicle, buying Lululemon clothing instead of a more affordable option, doing a much-needed home renovation – to the benefit of Home Depot and Lowe’s, etc.
One of the biggest flaws in the broader market recovery is the economic health of the average consumer. Companies with a majority of business-to-business sales generally fare better than companies focused on business-to-business commerce. For example, Nvidia And Microsoft Are growing while AppleIncomes are stagnating. General Electric is hovering around a 52-week high, while United Parcel Service standing still above a 52-week low.
Consumer-facing businesses are more vulnerable if they offer a discretionary product line. For example, Walmart And Target recently reported revenue, with Walmart hits record high and up more than 24% year to date, while Target fell 8% on the day of its report.
Beware of short-term headwinds
Despite its recent struggles, the Vanguard Consumer Discretionary ETF has been a long-term winner and ranks second behind the Vanguard Information Technology ETF in total return over the past 10 years. Total return includes both capital gains and dividends.
VGT Total Return Level data by Y Charts
Things look bad in the short term, but consumer discretionary is a sector that tends to generate outsized growth during economic expansions. It’s a major bet on the American economy and major American brands. Many of these companies have expanded overseas and have enormous growth potential among consumers in developing countries.
If you believe in a renewed vigor of the American consumer and in global economic development that would benefit American companies, then this sector is for you.
Despite multi-decade tailwinds, the sector could continue to underperform as interest rates remain high. A few months ago, there was hope that the Federal Reserve would begin cutting interest rates in the first half of the year. But the first half of the year is almost over, and there are no current timetable for whether the Fed will cut rates in 2024.
Higher interest rates make borrowing more expensive, leading to an increase in major expenses like mortgages, car payments and credit card fees. I strongly believe in this sector for the long term, but I admit there are some worrying charts. The one below shows the evolution over 20 years of credit card debt in the United States and the fixed rate of housing affordability in the United States.
American credit card debt data by Y Charts
An index level of 100 means that a family earning a median income has exactly enough money to afford a mortgage on a median-priced home with a 20% down payment. The level is currently around 100, which means that many people cannot afford housing in these conditions. From the chart, you can see that it is about the same level as it was during the 2008 housing bubble.
The U.S. housing affordability flat rate is a useful measure because it takes into account mortgage interest rates and housing prices. With mortgage rates and home prices both at multi-year highs, the index indicates that the housing market is relatively unaffordable.
Macroeconomic factors, particularly those focused on consumption, are key to the consumer discretionary sector. About 50% of monthly spending by American households move towards housing and transport. Add to that food, personal insurance, pensions and health care, and it represents 83% of monthly expenses. The more these expenses increase, the less people can afford discretionary spending.
A great buy and hold game
When approaching a long-term investment opportunity, it is important to understand both the bull case and the bear case. The bearish case for the consumer discretionary sector is compelling and supported by worrying economic data and weak financial results from key sector leaders.
However, the factors weighing on the sector mainly relate to interest rates and other short-term challenges. The sector could continue to be volatile and sell off more from here on out, but if you agree with its long-term growth potential, this is a sector to buy or at least add to your watch list.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Airbnb, Amazon, Apple, Chipotle Mexican Grill, Home Depot, Lululemon Athletica, Microsoft, Nvidia, Target, Tesla, Vanguard Real Estate ETF and Walmart. The Motley Fool recommends Lowe’s Companies, Tractor Supply, and United Parcel Service and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Mad Motley has a disclosure policy.