Current sky-high inflation and the prospect of several interest rate increases this year to temper inflation could weigh heavily on consumer spending in the coming months. According to Goldman chief economist Jan Hatzius, “Alternative data indicate a slowdown in consumer spending in late April and early May perhaps in response to tighter financial conditions and higher consumer prices.” U.S. GDP declined 1.4% in the first quarter and missed analyst expectations of a 1% gain. Furthermore, Hatzius lowered his second-quarter GDP estimate to 2.5% from 2.9%.

U.S. consumer confidence hit an 11-year low in early May. With rising costs of living, there is a high possibility that U.S. consumers could reduce their spending in the coming months.

Given this backdrop, we think it could be prudent to avoid consumer discretionary ETFs SPDR Select Sector Fund – Consumer Discretionary (XLY) and Vanguard Consumer Discretion ETF (VCR).

SPDR Select Sector Fund – Consumer Discretionary (XLY)

XLY provides exposure to the consumer discretionary sector, making it an attractive option for investors seeking to implement a sector rotation strategy or tilt exposure towards corners of the U.S. market that may perform well during recovery.

The fund has approximately $15.62 billion in assets under management (AUM). Amazon.com, Inc. (AMZN) is the top holding of XLY, with a 19.39% weighting, followed by Tesla Inc (TSLA) and McDonald’s Corporation (MCD), with 18.25% and 5.85% weightings, respectively.

XLY has a 0.10 expense ratio and pays an annual dividend of $1.09, translating to a 0.54% yield. The fund has declined 30.2 % year-to-date and 32.2% over the past six months. Over the past month, the ETF’s net fund outflows were $200.28 million.

Closing the last trading session at $142.80, the ETF is currently trading 33.6% below its 52-week high of $215.06. XLY’s NAV stands at $152.81. The fund has a 1.17 five-year monthly beta, which indicates higher volatility than the broader market.

XLY’s POWR Ratings reflect this bleak outlook. The ETF has an overall rating of D, which equates to Sell in our proprietary rating system.

XLY has an F grade for Trade and a D grade for Peer. Among the 48 ETFs in the C-rated Consumer-Focused ETFs group, XLY is ranked #15. Click here to see the additional POWR Ratings of XLY.

Vanguard Consumer Discretion ETF (VCR)

The VCR ETF provides targeted exposure to the U.S. consumer discretionary sector, including the stocks of companies that include apparel retailers, hotel operators, cruise line companies, automakers, and more. This ETF may appeal to some buy-and-hold investors during times of economic strength since the discretionary sector generally does well when consumers have a little extra money to spend.

VCR has approximately $4.52 billion in AUM. The ETF has an expense ratio of 0.10% and pays an annual dividend of $2.05, which translates into a 0.60% dividend yield. The fund’s major holdings include AMZN with a 19.18% weighting, TSLA, and Home Depot, Inc. (HD) with 15.19% and 6.50% weightings, respectively.

The ETF has plunged 30.2% in price year-to-date and 33.1% over the past six months. The ETF has witnessed a $615.81 million net fund outflow over the past month.

Closing the last trading session at $237.94, the ETF is currently trading 34% below its 52-week high of $360.54. Its NAV stands at $254.36. The fund has a five-year monthly beta of 1.33, indicating higher volatility than the broader market.

VCR’s weak fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of D, which equates to Sell in our proprietary rating system.

VCR has an F grade for Trade and a D grade for Peer. In the Consumer-Focused ETFs group, it is ranked #16. Click here to see the additional POWR Ratings of VCR.

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