S&P 500: Tech Is So 2020. How To Own The Future’s Fastest Growing Sector

When you think of fast-growing S&P 500 sectors, technology probably springs to mind. But new estimates show another sector will push it aside, possibly prompting you to adjust your ETFs.

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Analysts polled by S&P Dow Jones Indices say earnings in the consumer discretionary sector will rise 29.1% annually over the next five years. That’s the highest growth rate of all 11 sectors, including technology. Tech’s bottom line is growing at just 14% annually.

Part of this expected growth is the result of a modernization of the sector. “Amazon.com (AMZN) and Tesla (TSLA) are disproportionately the largest companies in the sector on a market-cap weighted basis, on which the sector’s EPS data and most sector ETFs are built,” said Todd Rosenbluth, Head of Research at VettaFi.

Seek value in consumer discretionary

Much of the rapid growth in consumer discretionary is coming from the giants within it.

EV maker Tesla is expected to post more than 1,000% earnings growth from 2020, according to 2025 forecasts. Tesla alone accounts for 22.5% of the sector. Amazon is also making a big contribution. The company’s weight in the industry is 22%. And analysts expect earnings to grow 144% through 2025 from where they were in 2015.

But the growth of the sector does not only depend on these two companies. hotelier Hilton worldwide (HLT) is the most anticipated breeder of the group. Analysts expect the company’s adjusted earnings per share to be nearly 9,000% higher through 2025 than in 2020.

Hopes for growth in consumer discretionary are high, but they still don’t make up a large part of many people’s portfolios. The sector has only the third-largest weight in the S&P 500 at 11.8%, behind information technology at 27% and healthcare at 14.9%.

Use ETFs to increase your exposure

There are ways to gain more exposure to the growth of consumer discretionary stocks. Rosenbluth’s first choice is the Consumer Discretionary Select Sector SPDR (XLY). The $14.7 billion ETF tracks the nearly 60 stocks in the S&P 500’s consumer discretionary sector. The ETF only charges an annual fee of 0.1%. It “is a strong ETF based on its exposure to large-cap stocks for a small fee,” Rosenbluth said.

Another option, Rosenbluth says, is the Vanguard Consumer Discretionary ETF (VCR). This $4 billion fund not only holds the large-cap consumer staples stocks, but also adds mid-cap and small-cap stocks. The expense ratio is also 0.1%. The ETF “is a solid alternative because it has some small- and mid-cap exposure in addition to the large caps found in XLY,” Rosenbluth says.

In consumer discretionary, size matters

However, it is important to note that the rapid growth of consumer discretionary companies is expected to come from the large caps. According to the S&P Dow Jones Indices, middle-market consumer goods companies are only likely to grow at an annual rate of 11% over the next five years. And small companies in the industry are only growing at 11.2% annually. For comparison, small-cap tech stocks are expected to grow 17% annually.

“Investors looking for a more diversified alternative to XLY should consider the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD),” Rosenbluth said. The $338 million fund invests equally in the sector’s big caps. That means it’s “less driven by Amazon and Tesla. The ETF is rebalanced quarterly,” he said.

But there’s another downside to consumer discretionary that’s worth being aware of. The sector’s dividend yield is lower than that of the S&P 500. The SPDR S&P 500 Trust currently yields 1.7%. That’s significantly more than the XLY’s 0.8% yield.

However, if you’re looking for future growth, it may well be worth sacrificing some yield.

Consumer Discretionary Champions

Expected earnings growth from top members of the Consumer Discretionary Select Sector SPDR

Sources: IBD, S&P Global Market Intelligence