Consumer Spending and Sentiment Rises: Time to Buy the XLY?

Key Points

• The XLY ETF tracks the Consumer Discretionary Select Sector Index, which comprises various media, retail and leisure industries.
• As consumer spending and sentiment rise, the XLY ETF has emerged as a promising opportunity.
• Top holdings of XLY include Amazon, Tesla and Home Depot, presenting diverse opportunities for potential growth amidst market fluctuations.

With consumer spending and sentiment on the upswing, the Consumer Discretionary Select SPDR ETF NYSE: XLY emerges as a potentially promising investment avenue. Its relevance in the current economic landscape cannot be overstated.

The latest report from the Commerce Department in March indicated a noteworthy surge in consumer spending, marking the most significant increase in over a year and highlighting the economy's enduring resilience. Despite heightened borrowing costs, the United States surpasses its global counterparts, mainly due to its robust strength in the labor market. 

Moreover, March saw an unexpected rise in U.S. consumer sentiment, reaching its highest point in nearly three years. This was partly due to growing confidence in inflation softening. The University of Michigan's Consumer Sentiment Index climbed to 79.4, up from February's 76.9 and its highest level since July 2021. 

This positive trend in consumer spending and sentiment suggests promising prospects for the consumer discretionary sector, indicating potential opportunities for growth and investment.

As sentiment and spending rise and the consumer discretionary ETF consolidates above its rising 200-day Simple Moving Average (SMA), let's examine the XLY ETF and its top holdings closer to better understand the sector and the opportunity.

What is the XLY ETF?

The Consumer Discretionary Select Sector SPDR Fund (XLY) aims to track the performance of the Consumer Discretionary Select Sector Index, which includes companies from various industries such as media, retail, hotels, restaurants, leisure, textiles, apparel, household durables, automobiles and diversified consumer services.

The ETF has close to $20 billion in assets under management, offers a 0.75% dividend yield and has a net expense ratio of 0.10%. Holdings in the XLY have an aggregate rating of Moderate Buy and an aggregate price target of $199.39, predicting an almost 11% upside for the ETF.

The ETF presents a bullish pattern on a higher timeframe and from a technical analysis perspective. Not only is it consolidating above its rising 200 and 50-day SMA, but it is also consolidating above the previous resistance near $175. Year-to-date, the ETF has risen a mere 0.64%. However, if it can consolidate in the upper band, near $185, it might finally be ready for a breakout higher.

The direction of the sector will be primarily based on consumer spending and sentiment, as well as capital flow and reallocation in the second quarter -- but it's the top holdings in the XLY ETF that will significantly influence its overall momentum.

XLY ETF's Top 3 Holdings 

1. Amazon.com, Inc.

Amazon.com, Inc. NASDAQ: AMZN is the ETF's top holding, with a whopping 22.94% weighting. With Amazon shares trading at all-time highs, up over 20% year-to-date, and a projected earnings growth of 30.39%, the entire year bodes exceptionally well for the sector ETF. Despite the stock's impressive growth this year, analysts are forecasting an almost 9% upside based on the consensus price target for Amazon.

2. Tesla, Inc.

With a 19.14% weighting, Tesla, Inc. NASDAQ: TSLA is the ETF's second-largest holding. Tesla's immense selloff since the start of the year has been a major contributor to XLY's underperformance year-to-date. Tesla shares have fallen over 33% so far this year, making it the worst performer in the S&P500 index. As the stock approaches a significant support area near $150, investors hope the stock can finally catch a bid, which would positively impact the sector ETF.

3. Home Depot

Home Depot NYSE: HD has a 4.7% weighting in the sector ETF, making it the third largest holding. Although shares of the big-box retailer have fallen dramatically over the past week, down over 6%, the stock remains in a higher timeframe uptrend, above a rising 200-day SMA, and up over 20% over the previous year. HD is one of the most upgraded stocks with a Moderate Buy rating based on 26 analyst ratings. The stock has a consensus price target of $376.35, predicting close to 5% upside.

So, Is It Time to Buy the XLY?

Ultimately, while the positive shifts in consumer dynamics hint at a favorable moment, whether or not investors incorporate the XLY into their portfolios hinges on a balanced consideration of opportunity and risk. As discretionary spending increases, the XLY stands out as a potentially strategic opportunity, but investors should also take into account broader market conditions, interest rate forecasts and individual risk tolerance before making an investment in the XLY.